THE  GIFT  OF 

MAY  TREAT  MORRISON 

IN  MEMORY  OF 

ALEXANDER  F  MORRISON 


*4- 


Taxation  and   Taxes 

IN    THE 

UNITED   STATES 


UNDER    THE 


INTERNAL   REVENUE  SYSTEM 
1791-189S 


AN  HISTORICAL  SKETCH  OF  THE  ORGANIZATION, 

DEVELOPMENT  AND  LA  TER  MODIFICA  TION 

OF  DIRECT  AND  EXCISE  TAXATION 

UNDER  THE  CONSTITUTION 


BY 

FREDERIC  C.  HOWE,  A.M.,  Ph.D. 


NEW  YORK:    46  East  i4th  Street 

THOMAS    Y.    CROWELL  &   COMPANY 

BOSTON:   100  Purchase  Street 


Copyright,  1896, 
By  Thomas  Y.  Crowell  &  Company. 


C.    J.    PETERS   &   SON,    TYPOGRAPHERS. 


J~OZO 

H  S3^t 


PREFACE. 


The  present  essay  is  the  development  of  an  investiga- 
tion begun  some  years  ago  of  an  unimportant  portion  of 
our  Internal  Eevenue  System.    At  that  time  the  federal 
revenues  were  largely  in  excess  of  all  current  demands 
of  the  Treasury ;  and  the  policy  of  the  party  dominant 
£  in  the  councils  of  the  nation  seemed  to  be  towards  the 
^  gradual  reduction,  if  not  the  permanent  relinquishment, 
s  of  all  of  the  internal  or  excise  taxes. 

With  the  alterations  of  the  customs  schedule  in  1894, 
however,  and  the  diminution  of  collections  from  exter- 
O  nal  sources,  it  became  apparent  that  further  recourse  to 
5  inland  objects  would  be  necessary;  and  in  view  of  the 
paucity  of  literature  bearing  upon  the  Internal  Eevenue 
System,  it  seemed  that  a  narration  of  the  history  of  a 
department  of  our  fiscal  service,  which  produces  at  the 
present  time  upwards  of  one  hundred  and  forty-five  mil- 
•s  lions  of  dollars,  or  nearly  forty  per  cent  of  the  total 
^  collections  of  the  federal  government,  would  not  be 
°  untimely  or  wholly  devoid  of  interest.  And  the  ex- 
periences herein  recounted  most  clearly  indicate  how 
almost  inexhaustible  are  the  sources  of  taxation  as  yet 
untouched  of  which  the  Treasury  may  avail  itself  in 
case  of  need,  and  show  an  array  of  unused  taxes  and 
unopened  resources  unparalleled  in  contemporary  bud- 
getary  history. 


2 
u." 
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a 


.33S94 


vi  PREFACE. 

I  desire  to  make  acknowledgment  of  the  assistance 
rendered  in  the  preparation  of  so  much  of  the  following 
pages  as  covers  the  period  of  the  Civil  War  to  the 
learned  researches  of  Hon.  David  A.  Wells,  the  chair- 
man of  the  Revenue  Commission  of  1865,  and  the  later 
appointed  Special  Commissioner  of  the  Revenue.  The 
student  of  this  period  must  recognize  his  indebtedness 
to  the  work  of  this  eminent  economist  and  statistical 
expert,  whose  careful  and  scholarly  investigations  of 
almost  every  phase  of  the  revenue  experiences  of  the 
time,  as  well  as  the  industrial  aspects  and  influences  of 
the  same,  are  an  inexhaustible  fund  from  which  to  draw, 
and  greatly  alleviate  the  labors  of  those  who  may  follow 
after  him  in  a  field  which  he  has  made  completely  his 
own.  In  that  portion  of  the  essay  which  relates  to  the 
taxation  of  distilled  spirits,  as  well  as  the  relation  of 
the  excise  to  prices,  wages,  and  industry,  I  have  made 
liberal  use  of  his  investigations,  although  I  have  taken 
the  liberty  of  differing  from  some  of  his  conclusions. 

I  am  further  indebted  to  Professor  Richard  T.  Ely  of 
the  University  of  Wisconsin  for  man}'  kindly  aids  and 
suggestions  as  to  the  scope  and  character  of  the  work, 
as  well  as  for  encouragement  in  its  completion.  I  am 
also  under  obligations  to  Professor  Charles  H.  Haskins 
of  the  same  university,  and  Dr.  Charles  J.  Bullock  of 
Cornell  University,  for  reading  the  manuscript,  to 
whose  kindly  criticism  and  suggestions  some  important 
changes  in  the  plan  of  the  work  are  due.  I  am  also 
greatly  in  debt  to  Professor  David  Kinley  of  the  Uni- 
versity of  Illinois  for  reading  the  proof-sheets. 

FREDERIC   C.   HOWE. 

Cleveland,  Ohio,  March,  1S96. 


CONTENTS 


Preface v 

Introductory. 

Constitutional  evolution  — p.  1.  Financial  development  a 
reflection  of  same  — p.  3.  Growth  of  federal  expenditure  — 
p.  3.     Present  problems  of  the  Internal  Revenue  System  — 

p.  7. 

I.  Early  Attempts  at  Internal  Taxation. 

The  finances  under  the  Confederation  —  p.  9.  Provisions  of  the 
Constitution  regarding  federal  taxation  — p.  10.  Direct  taxes, 
meaning  of,  in  Convention  (note)  —  p.  11.  Hamilton's  proposals 
—  p.  13.  Taxation  and  the  excise  in  the  Colonies  — p.  14. 
Aversion  of  colonists  to  inland  taxation  —  p.  17.  The  duty  on 
distilled  spirits.  Act  of  .March  3,  1791  —  p.  19.  Later  amend- 
ments—p.  21.  Unpopularity  of  Tax  — p.  21.  The  Whiskey 
Rebellion  —  p.  23.  Issue  in  reality  but  a  phase  of  constitutional 
development  —  p.  24.  Collections  —p.  25.  Act  of  June  5, 1794, 
and  taxes  on  carriages  — p.  26.  The  Carriage  Tax  Case  — 
p.  27.  Duties  on  Sales  at  Auction,  Licenses,  Snuff,  Sugar, 
and  Stamps  —  p.  28.  Collections  from  same,  1795-1800  —  p.  31 . 
The  Direct  or  Apportioned  State  Tax  — p.  30.  Repeal  of 
internal  taxes  —  p.  34.  Public  opinion  on  the  subject  of 
taxation  —  p.  35.     Administration  and  collections  —  p.  36. 

II.  The  Emergency  System  of  the  War  of  1812. 

Condition  of  Treasury  at  the  outbreak  of  the  War  of  1812  — 
p.  39.  Attitude  of  Gallatin  on  inland  taxes  —  p.  39.  The 
taxes  of  1813—  p.  41.  The  policy  of  Secretary  Dallas  —  p.  4:;. 
Opposition  to  same  —  p.  44.  New  taxes  —  p.  45.  Close  of 
-War  — p.  46.  Repeal  of  taxes  — p.  47.  Necessity  of  perma- 
nent inland  taxes  —  p.  48.  Collections  —  p.  49. 
vii 


Vlll  CONTENTS. 

III.   The  Period  of  the  Civil  War  (1861-1870). 

Characteristics  of  period  from  1817  to  1861  —  p.  50.  Changes 
wrought  by  War  —  p.  51.  Condition  of  Treasury  in  1860  —  p. 
51.  Proposals  of  Secretary  Chase — p.  52.  Act  of  Aug.  5, 
1861  —  p.  53.  Proposals  for  new  taxes  —  p.  54.  Act  of  July  1, 
1862 ;  provisions  of  same  and  general  character  of  measure  — 
p.  57.    Effect  on  revenues  and  condition  of  Treasury  in  1863 

—  p.  59.  Loan  policy  of  the  Administration  a  failure  —  p.  61. 
Fresh  proposals  from  Secretary  Chase  — p.  61.  War  policy  of 
Secretary  Chase  and  criticisms  of  same  —  p.  61.  Acts  of  March 
7  and  June  30,  1864  —  p.  63.  Opposition  of  manufacturers  to 
general  excise  —  p.  65.  The  proposed  tax  on  sales  —  p.  66. 
Condition  of  Treasury  at  close  of  War  — p.  67.  Act  of  March 
3,  1865  — p.  68.  The  productivity  of  the  excise  — p.  68.  In- 
ternal taxes  should  never  be  wholly  relinquished  —  p.  70. 
Financial  problems  at  close  of  war— p.  70.  The  Revenue 
Commission  and  its  recommendations  —  p.  72.  Reduction  of 
the  public  debt  the  main  object  of  public  solicitude—  p.  74. 
Industrial  condition  of  the  country  —  p.  75.  Reduction  of 
taxes  — p.  76.  Revenues  1866  and  1867  —  p.  77.  Prices  fail 
to  follow  reduction  of  duties  —  p.  78.  Arbitrary  condition  of 
trade  relations  —  p.  79.     Lessons  of  period  —  p.  81. 

IV.  Direct  Taxes  on  Persons  and  Property. 

I.  The  Direct  or  Apportioned  State  Tax. 

Direct  Tax  of  1798  the  model  of  later  enactments  —  p.  82. 
Provisions  of  Act  of  Aug.  5,  1861  — p.  83.  General  consider- 
ation of  Direct  Tax  as  a  federal  measure  — p.  84.  Collec- 
tions under  the  tax  — p.  85.  Its  operations  in  Southern 
States  — p.  86.  Congress  adopts  relief  measures  — p.  87.  The 
Government  in  an  anomalous  position  —  p.  88.  Act  of  March 
2,  1891,  refunding  Direct  Tax  to  the  States  — p.  89. 

II.  The  Income  Tax. 

Provisions  of  Act  of  Aug.  5,  1861,  as  to  income  tax  — p.  90. 
Modifications  introduced  by  later  measures  — p.  91.  Special 
income  tax  of  1864  — p.  93.  Close  of  War  and  recommenda- 
tions of  Revenue  Commission  — p.  94.   Subsequent  alterations 

—  p.  95.  Unpopularity  of  income  tax  — p.  95.  Method  of 
reaching  corporations  —  p.  96.  Collections  on  behalf  of  the 
Tax  — p.  97.  Territorial  distribution  of  tax  — p.  101.  Gen- 
eral considerations  — p.  102, 


CONTENTS.  IX 

III.   Taxes  on  Corporations. 

A.  The  Gross  Receipts  Tax  on  Railroads,  Advertisements, 

Bridges,  Canals,  Express  Companies,  Ferries,  Lot- 
teries, Ships,  Barges,  Stages,  Steamboats,  Telegraph 
and  Insurance  Companies,  and  Museums,  Operas, 
Circuses,  etc. 
The  Gross  Receipts  tax  on  transmission  companies  especially 
suited  to  federal  purposes  —  p.  102.     Provisions  of  several  acts 
—  p.  103.     Collections—  p.  106. 

B.  Banks,  Trust  Companies,  and  Savings  Institutions. 
Provisions  for  taxing  —  p.  108.    Collections  —  p.  109.    National 
Banks  — p.  109. 

TV.     Assessed  Taxes,  known  as  "Schedule  A." 
Unsuited  for  national  purposes  — p.   111.     Rates  imposed  — 
p.  111.     Collections  — p.  112. 

Taxes  on  Successions,  Acts  and  Transfers,  Instruments, 
Commodities  and  Businesses. 

I.  Duties  upon  Legacies  and  Distributive  Shares  of  Prop- 

erty. 

A.  Legacy  and.  Succession  Duties. 

Provisions  of  Acts  of  1862  and  1861  — p.  111.     Incompleteness 
of  collections  —  p.  115.     Receipts  —  p.  117. 

B.  Probate,  Administration,  and  Inventory  Duties,  col- 

lected by  means  of  Stamps. 
Early  Stamp   duties  on   legacies  and   successions  —  p.   119. 
Rates  under  Acts  of  1862  and  1861  —  p.  120. 

II.  Taxes  upon  Legal   Instruments,    Commercial    Trans- 

actions, and   Commodities,  collected    by  means    of 

Stamps. 
Stamp  Tax,  general  consideration  of  —  p.  120.     Legal  provis- 
ions of  Act — p.   121.     Incidence  and  operation  of  —  p.  123. 
Collections  from  —  p.  121. 

in.  The  Duties  on  Sales  at  Auction,  of  Apothecaries, 
Butchers,  Brokers,  Confectioners,  Dealers,  Plumb- 
ers, and  Manufacturers. 
Sales  at  Auction  first  dutiable  in  1791  and  1812  — p.  126.  As 
revived  during  Civil  War  — p.  126.  Rates  of  — p.  126.  Evi- 
dence and  Recommendations  of  Revenue  Commission,  and 
Amendments  — p.   127.      Ad  valorem  Tax  on  Sales  vs.  the 


X  CONTEXTS. 

General  Excise  —  p.  128.    Later  Changes  and  Collections  from 

—  p.  129. 

IV.    Special    or    License    Taxes    upon    Occupations    and 
Gainful  Pursuits. 

Method  of  Assessment  and  Incidence  of  —  p.  131.  Popu- 
larity of  Tax  —  p.  132.  Provisions  of  —  p.  133.  Receipts  — 
p.  134. 

VI.  Indirect  Taxes  ox  Consumption. 
I.  Distilled  Spirits. 
Universality  in  the  Taxation  of  Distilled  Spirits — p.  136. 
Consumption  of,  in  the  United  States  in  1860 — p.  137.  Held 
to  he  especially  suited  for  Taxation,  from  "  inelasticity  of  the 
demand"  —  p.  138.  Early  "War  Legislation  —  p.  138.  Evils 
induced  hy  changes  in  the  rates  — p.  139.  Speculation  —  p. 
110.  (1)  The  tax  rates  and  the  revenues  —  p.  142.  Collections 
under  the  .82.00  rate  disappointing  —  p.  143.  Receipts,  rates, 
and  annual  production  from  1863  to  1S68  —  p.  144.  Results 
consequent  on  reduction  of  rate — p.  144.  (2)  Fraud  and 
Evasion  — p.  145.     Influence  of  change  in  rate  on  production 

—  p.  146.  Evasion,  examples  of  —  p.  147.  (3)  Speculation  — 
p.  151. 

U.     Fermented  Liquors. 
Early  rates   of   taxation  of  —  p.  154.      Later  modifications  — 
p.  154.     Phenomenal  increase  in  consumption  of  —  p.  155. 

m.     Tobacco. 
Provisions  of  laws  of  1862  and  1864  —  p.  157.     Assessments  — 
p.   158.      Changes  in    rates  —  p.   161.      Collections  —  p.   162. 
Fraud  and  evasion  —  p.  163.    Measure  of  1S68  and  improve- 
ments resulting  therefrom  —  p.  164.    Recent  changes  —  p.  165. 

TV.   The    General  Excise  upon  Manufactures  and  Prod- 
ucts. 
Burdensome  nature  of  the  excise  and  its  effect  upon  indus- 
try—  p.  166.     Pates  imposed  and  collections  —  p.  169. 

A.  The  Excise  and  Prices. 
Effect  of  taxes  on  prices  —  p.  172.  Spirit  of  speculation  and 
business  uncertainty  —  p.  172.  Study  of  prices  largely  con- 
jectural—  p.  173.  Opinion  of  Mr.  Wells  as  to  influence  of 
excise  in  causing  inflation  of  prices  during  the  period  — 
p.  173.    Amount  of  taxes  collected  —  p.  174. 


COXTENTS.  XI 

B.  The  Excise  and  the  Wage  Earner. 

Effect  of  taxation  on  capital  invested  in  productive  enter- 
prises—  p.  175.  Result  of  uneven  rise  in  prices  —  p.  176. 
Statistics  of  prices,  wages,  and  consumption  for  the  period 
—  p.  177.  General  tendency  of  excise  to  enhance  cost  of 
living,  but  not  wages  —  p.  180. 

C.  The  Excise  and  Industry. 

Difficulty  of  tracing  the  exact  effect  of  the  excise  upon 
industry  —  p.  181.  Prejudicial  to  some,  to  others  a  source 
of  profit  —  p.  183.  Statistics  of  patents  granted  —  p.  184. 
War  believed  to  have  been  paid  for  from  currently  created 
wealth  —  p.  185.     Intensification  of  production  —  p.  185. 

D.  Conclusion. 

The  excise  the  product  of  unusual  conditions  —  p.  186. 
Errors  of  Treasury  Department  —  p.  187.  Could  the  war 
have  been  conducted  without  recourse  to  the  general  excise 
upon  manufactures  and  products?  —  p.  188.  Collections 
therefrom  —  p.  189.  Experience  indicative  of  certain  limi- 
tations upon  the  power  of  government  to  impose  and  collect 
taxes  —  p.  189.  Subsequent  improvement  in  the  excise  — 
p.  190. 

VII.   The  Administration  of  the  Internal  Revenue  System. 

General  objections  to  the  excise  —  p.  191.  Administrative 
details  of  the  measure  of  18(52  —  p.  192.  Administration 
vitiated  by  the  "spoils  system"  —  p.  191.  Early  years 
characterized  by  faulty  administration  —  p.  196.  Collec- 
tions in  Southern  States  —  p.  197.  Changes  in  method  of 
assessment  subsequent  to  the  war  —  p.  198.  The  Frauds  of 
1875  and  the  "  Whiskey  Ring  "  —  p.  201.  Present  condition 
of  the  service  —  p.  202.  Administration  as  it  is  to-day  — 
p.  203.  Special  or  license  taxes  —  p.  204.  Distilled  spirits 
—  p.  205.  Fermented  liquors  — p.  20S.  Tobacco,  cigars, 
and  snuff  —  p.  209.  Oleomargarine  —  p.  210.  Cost  of  col- 
lection—  p.  211. 

VIII.   Internal  Taxation   Under  Peace  Conditions,  1870-1895. 

Increase  in  governmental  expenditure  the  characteristic 
feature  of  recent  years  —  p.  214.  The  Internal  Revenue 
System  now  a  necessity  —  p.  216.  Collections  from  internal 
sources  in  1870  —  p.  216.     Distilled  and  malt  liquors  and 


xii  COXTENTS.- 

tobacco  especially  fitted  for  taxation  —  p.  217.  Changes 
introduced  in  1868  in  the  rates  and  methods  of  taxing  spirits 
and  tobacco  — p.  217.  Subsequent  modifications  — p.  218. 
Condition  of  revenues  in  1880  —  p.  221.  Abatement  of  taxes 
recommended  by  the  Commissioner — p.  222.  The  reduc- 
tion in  the  Internal  Revenue  System  —  p.  222.  Comparison 
of  collections  from  tobacco  in  the  United  States  and  foreign 
countries  — p.  22-1.  Tables  of  collections  on  behalf  of  Dis- 
tilled spirits,  Malt  liquors,  and  Tobacco  from  1863  to  1893  — 
p.  225.  Recent  Legislation  — p.  227.  Deficiencies  of  1893 
and  1894  — p.  228.  Avenues  for  relief  —  p.  229.  Secretary 
Carlisle's  proposals  in  1893  —  p.  231.  Act  of  Aug.  28, 1894  — 
p.  233.  Provisions  as  to  Income  Tax  —  p.  233.  Features  of 
the  law  —  p.  235.  Consideration  of  the  general  advisability 
of  the  income  tax  — p.  236.  Is  demanded  to  equalize  the 
burdens  of  the  indirect  duties  as  well  as  the  inequalities  of 
State  and  local  taxes  — p.  237.  Constitutionality  of  the 
Income  Tax  — p.  242.  Increase  in  the  duty  on  distilled 
spirits,  and  new  duty  on  playing  cards  — p.  252.  Large 
increase  in  withdrawals  of  distilled  spirits  to  anticipate  the 
tax  and  losses  to  the  revenue  therefrom  — p.  253.  Collec- 
tions on  behalf  of  the  Internal  Revenue  System  for  the 
fiscal  years  1893,  1894,  and  1895  —  p.  254.  The  incidence  of 
the  internal  revenue  taxes  on  Spirits,  Beer,  and  Tobacco  — 
p.  254.  Consumption  of  the  same  as  influenced  by  taxation 
—  p.  256.     Conclusion  —  p.  263. 


CONTENTS. 


APPENDICES. 


PAGE 

269 


I.   Bibliography 

II.   Schedule  of    Internal  Revenue  Duties,   from  1862 

to  1867 273 

A.  Corporations,  on  Gross  Receipts  and  Personal  In- 

come Taxes 273 

B.  Assessed  Taxes,  known  as  Schedule  "A"  .     ...    274 

C.  Legacies  and  Succession  Duties     ....'...    274 

D.  Stamp    Taxes    on  Instruments,    Acts,    and    Evi- 

dences    ~to 


E.    Licenses 


270 


F.    Excise  upon  Manufactures  and  Products   ....    2<8 

III.  Schedule  of  Duties  on  Objects  now  Taxable  under 
the  Internal  Revenue  Laws:  — 

A.  Rates  of  Tax  on  Spirits  under  the  Different  Laws 

which  have  been  in  force •    280 

B.  Acts   imposing  Tax   on   Fermented    Liquors,   and 

Rates  of  Tax 281 

C.  Date  of  Acts  imposing  Tax  on  Tobacco,  and  Rates 

of  Tax 282 

D.  Date  of  Acts  imposing  Tax  on  Cigars  and  Ciga- 

rettes, and  Rates  of  Tax 284 

IV.  Schedule  of  Articles  and  Occupations  subject  to 
Tax  under  the  Internal  Revenue  Laws  of  the 
United  States,  in  force  Aug.  28,  1894 286 

V.   Table  showing  Receipts  from  Each  Specific  Source 
of  Revenue  for  Fiscal  Years,  from  Sept.  1,  1862, 

to  1871 290,  291 

VI.   Receipts   from   Several  Sources  of  Revenue,  from 

1870  to  1895 292,  293 


INTRODUCTORY. 


The  history  of  the  first  century  of  our  national  life 
naturally  divides  itself  into  three  periods,  quite  distinct, 
and  characterized  by  political  ideas  more  or  less  diverse. 
The  first  is  the  tentative,  experimental  period  immedi- 
ately subsequent  to  the  organization  of  the  government 
under  the  new  Constitution,  when  the  nation,  timorous 
of  self  and  even  more  apprehensive  of  lapsing  into  state 
anarchy,  gathered  itself  together  for  the  work  of  unifi- 
cation ;  when  the  government,  endowed  with  unusual 
powers  and  blessed  with  guiding  hands,  possessed  of  the 
confidence  of  all,  aimed,  by  the  utilization  of  the  powers 
entrusted  to  it,  to  strengthen  the  federal  framework,  and 
repair  the  evils  engendered  by  the  impotent  Confedera- 
tion. Conscious  only  of  new  strength,  and  heedless,  if 
not  ignorant,  of  the  hidden  springs  of  State  jealousy 
which  it  offended,  the  Federalist  party  was  led  into 
excesses,  which  the  people,  sensitive  of  any  impairment 
of  the  prerogatives  of  the  States,  later  resented  at  the 
polls.  Nationalism  attempted  too  much,  and  recoiled 
upon  itself.  The  centralizing  tendencies  of  Hamilton, 
looking  to  a  high  tariff,  a  federal  excise,  and  a  national 
banking  system,  all  encroachments  upon  the  powers  of 
the  States,  were  in  advance  of  public  sentiment,  and 
militant  federalism  was  forced  to  retire  before  the 
prejudices  of  State  conservatism.     The  Union  must  be 

1 


2  THE  INTERNAL   REVENUE  SYSTEM. 

conserved,  all  agreed,  but  its  flight  must  not  be  too 
high.  Increase  of  power  was  felt  to  be  cousin-german 
to  abuse  of  power;  and  democracy,  in  the  minds  of 
many,  was  only  consistent  with  little  government. 

This  conservative  attitude,  with  respect  to  the  im- 
portance of  the  States,  found  frequent  expression  in  the 
sentiments  which  controlled  political  thought  and  action 
during  the  long  period  which  extended  from  the  opening 
of  the  century  down  to  the  outbreak  of  the  Civil  War ; 
a  period  when  the  limitation  of  governmental  functions 
to  the  smallest  possible  compass  was  the  aim  of  the 
party  in  power,  and  "let  alone"  its  conscious  attitude 
towards  internal  affairs.  It  was  a  period  of  political 
segregation  along  economic  lines,  of  extreme  simplicity 
in  manners  and  customs,  of  wide  diffusion  of  comfort 
and  wealth,  and  of  little  diversity  in  industrial  life. 
During  this  period  the  financial  policies  were  simple. 
A  low  tariff  sufficed  for  all  the  needs  of  a  frugal  ad- 
ministration of  affairs ;  and,  saving  the  temporary  war 
duties  imposed  during  the  emergencies  of  1812  and  the 
few  years  following,  no  attempt  was  made  to  derive 
revenues  from  internal  sources. 

With  the  outbreak  of  the  Civil  War,  however,  neces- 
sity enforced  a  more  liberal  interpretation  of  the  Con- 
stitution, and  the  next  few  years  witnessed  a  radical 
change  in  political  ideals,  till  these  were  brought  more 
into  harmony  with  the  broader,  fuller  national  life  upon 
which  the  country  was  entering ;  for,  just  as  the  period 
antecedent  to  1861  is  characterized  by  restricted  finan- 
cial operations,  moderation  in  taxation,  and  deficit  finan- 
ciering, so,  since  that  time  the  pendulum  has  swung 
to  the  opposite  extreme,  and  the  tendencies  dominant 


INTRODUCTORY.  3 

during  the  past  three  decades  have  been  towards  the 
fullest  possible  utilization  of  constitutional  powers,  and 
the  gradual  increase  in  governmental  activities. 

Revenues  extraordinary  have  been  extracted  from  the 
people,  which  have  been  disbursed  with  but  little  regard 
for  economy.  Instead  of  a  tariff  for  revenue  only,  the 
machinery  of  taxation  has  been  made  to  do  service  to 
special  interests ;  while  in  place  of  the  tentative  internal 
revenue  system,  so  ungraciously  sanctioned  in  cases 
of  emergency  by  earlier  administrations,  a  permanent 
excise  has  become  a  recognized  portion  of  our  revenue 
service. 

Of  this  constitutional  development  the  history  of  our 
budgetary  management  is  but  the  reflex.  The  position 
occupied  by  the  customs  and  internal  taxes  is  but  the 
mirror  of  opinions  prevailing  as  to  the  nature  of  the 
Union ;  and  it  was  not  until  the  war  had  laid  constitu- 
tional scruples  at  rest  that  the  latter  were  discussed  at 
all  dispassionately,  or  escaped  the  realm  of  purely  parti- 
san agitation. 

This  constitutional  development  is  reflected  quite 
graphically  in  the  revenues  and  expenditures  of  the 
Treasury,  and  it  may  not  be  impertinent  briefly  to  con- 
sider them. 

Even  in  the  early  days  of  the  Republic,  there  is  no- 
ticeable a  persistent  tendency  of  expenditures  to  increase 
more  rapidly  than  population.  From  1792  to  1798  dis- 
bursements rose  from  $1,877,000  to  $4,623,000.  Ten 
years  later  they  had  further  increased  to  $6,504,000, 
while  by  1820  they  had  still  further  risen  to  $13,134,000. 
From  this  time  on  down  to  the  outbreak  of  the  war,  even 
under  the  restrictive  tendencies  dominant  in  the  Demo- 


4  THE  INTERNAL   REVENUE  SYSTEM. 

cratic  party,  expenditures  rose  from  an  average  annual 
disbursement  of  $12,390,000,  or  $1.07  per  capita,  during 
the  decade  extending  from  1821  to  1831,  to  an  annual 
average  of  $24,740,000,  or  $1.61  per  capita,  during  the 
succeeding  one.  During  the  next  decade,  while  the  total 
average  annual  expenditure  increased  nearly  forty  per 
cent,  the  per  capita  increase  was  but  about  one  and  a 
quarter  per  cent.  From  1851  down  to  the  entrance  of 
the  Republican  party  into  power,  -the  average  annual 
per  capita  increase  was  twenty-six  per  cent,  while  the 
total  average  annual  expenditure  grew  to  nearly  fifty' 
eight  millions  of  dollars. 

Marked  though  these  exhibits  are,  they  sink  into  in- 
significance in  the  light  of  later  history.  During  the 
five  years  from  1861  to  1866  the  expenditures,  exclusive 
of  interest  charges  and  the  public  debt,  reached  the 
extraordinary  average  of  $712,720,000  per  annum,  being 
$21.07  per  capita  in  currency,  or  $14.32  per  capita  in 
gold,  a  rate  of  increase  in  currency  of  920  per  cent  as 
compared  with  the  average  of  the  previous  decade. 
This  exhibit  would  have  naught  save  an  historic  interest 
had  expenditures  returned  to  a  normal  peace  basis,  and 
the  comparative  frugality  which  characterized  the  seven 
decades  of  our  history  previous  to  the  war  again  assumed 
sway.  But  such  was  not  to  be  the  case.  The  Constitu- 
tion had  been  bent  to  the  breaking-point,  and  it  would 
not  resume  its  former  rigidity.  The  ease  with  which 
heretofore  undreamt-of  resources  could  be  acquired,  and 
the  apparent  acquiescence  of  the  people  in  governmental 
extravagance,  induced  a  prodigality  in  the  disposition  of 
public  funds  which  has  gone  on  unabated  to  the  pres- 
ent day.      Moreover,  the  passion  for   spending  money, 


INTRODUCTORY.  5 

once  acquired,  is  only  relinquished  at  the  mandate  of 
an  oppressed  people ;  and  the  apparent  prosperity  of 
all  classes,  and  their  acquiescence  in  the  taxes,  led  to  a 
continuance  of  the  policy  inaugurated  by  the  war.  For 
the  fiscal  year  1867,  two  years  subsequent  to  the  close 
of  hostilities,  the  total  expenditures,  exclusive  of  boun- 
ties and  payments  on  account  of  the  public  debt,  was 
$  191,564,677  (in  currency),  as  compared  with  an  average 
annual  expenditure  of  fifty-eight  millions  ( in  gold  )  for 
the  decade  previous  to  the  war,  an  increase  of  two  hun- 
dred and  forty  per  cent.  This  remarkable  increase  is 
manifest  not  only  in  the  war,  navy,  and  other  depart- 
ments, but  also  in  the  civil  list  (156  per  cent),  foreign 
intercourse  (35  per  cent),  miscellaneous  (112  per  cent), 
Indians  (60  per  cent),  pensions  (1,929  per  cent),  as 
compared  with  the  disbursements  for  the  fiscal  year 
1861. 

During  the  next  five  years  the  net  expenditures  for 
war  purposes  manifest  a  tendency  to  decline,  with  a  less 
than  corresponding  increase  for  pensions  and  miscel- 
laneous purposes,  the  net  expenditures  in  1872  being 
$153,201,856.  For  six  years  more  a  spirit  of  econ- 
omv  marked  the  use  of  public  funds,  although  the  gross 
annual  expenditure  was  reduced  but  little.  From  this 
time  on  down  to  the  present  date  the  disbursements  of 
Congress  have  been  made  with  a  prodigal  hand,  and  upon 
few  departments  of  the  government  has  the  restrain- 
ing hand  of  economy  been  laid.  In  1878  the  customs 
revenue  began  to  increase  at  a  phenomenal  rate,  which 
continued  unabated  down  to  1893.  The  same  movement 
is  manifest  in  receipts  from  internal  sources,  despite  the 
constant  reductions  in  the  rates.     A  troublesome  surplus 


6  TEE   I  STERNAL   REVENUE   SYSTEM. 

presented  itself.  Customs  duties,  instead  of  being  low- 
ered, were  raised ;  and  the  abatements  in  the  excise 
taxes  gave  but  a  temporary  relief,  soon  compensated  by 
the  increase  in  the  consumptive  power  of  the  people. 
An  era  of  extravagant  expenditure  set  in,  only  surpassed 
by  the  experience  of  the  war.  Disbursements  for  pen- 
sions grew  from  twenty-seven  millions  in  1878  to  twice 
that  sum  two  years  later.  During  the  next  decade  they 
increased  to  one  hundred  and  seven  millions,  while  by 
1894  they  had  grown  to  one  hundred  and  forty-one  mil- 
lions. During  the  same  period  Indian  appropriations 
were  doubled,  as  were  those  for  miscellaneous  purposes 
and  the  navy  department. 

Thus,   for   1894   the  total  net  expenditures  were  as 
follows  :  — 

For  the  civil  establishment,  including  foreign 
intercourse,  public  buildings,  collecting  the 
revenues,  deficiency  in  postal  revenues, 
refund  of  direct  taxes,  bounty  on  sugar, 
District  of  Columbia,  and  other  miscel- 
laneous expenses 8101,943,884  07 

For  the  military  establishment,  including 
rivers  and  harbors,  forts,  arsenals,  and  sea- 
coast  defences 54,567,929  85 

For  the  naval  establishment,  including  con- 
struction of  new  vessels,  machinery,  arma- 
ment,   equipment,    and    improvements    at 

navy-yards 31,701,293  79 

For  Indian  service 10,293,481  52 

For  pensions 141,177,284  96 

For  interest  on  the  public  debt 27,841,405  64 

For  postal  service 75,080,479  04 

Total  expenditures $442,605,758  87 

One  of  the  influences  to  which  this  extravagant  expen- 
diture is  attributable  is  the  policy  of  surplus  financier- 


INTRODUCTORY.  1 

ing,  induced  by  the  redundant  revenues  subsequent  to 
the  resumption  of  specie  payments ;  and  the  party  domi- 
nant in  the  councils  of  the  nation,  threatened  with  a  per- 
manent surplus  in  the  revenues,  was  under  pressure  to 
reduce  the  scope  of  the  internal  revenue  system,  and 
some  few  individuals,  solicitous  for  the  preservation  of 
existing  tariff  arrangements,  even  advocated  its  entire 
abolition.  But  there  is  reason  to  believe  that  the  future 
will  see  an  even  greater  dependence  upon  the  excise 
than  at  present.  While  the  party  but  recently  in  power 
has  not  seriously  imperilled  the  revenues,  the  reduction 
of  the  customs  duties  has  already  rendered  necessary 
greater  reliance  upon  inland  sources. 

And  in  order  that  Ave  may  properly  consider  our 
present  fiscal  arrangements,  with  a  view  to  possible  alter- 
ations in  the  future,  it  is  necessary  to  understand  the 
past.  While  the  abounding  prosperity  of  the  nation 
has  rendered  the  people  more  or  less  indifferent  to  the 
weight  of  national  taxation,  as  well  as  its  incidence  and 
diffusion,  there  are  vital  questions  to' be  solved  in  a  just 
arrangement  and  distribution  of  burdens.  Shall  the 
amount  collected  upon  inland  subjects  be  increased  or 
diminished  ?  Shall  regard  be  had  to  the  "  poor  man's 
luxuries,"  and  whiskey,  beer,  and  tobacco  be  favored  by 
a  light  tax;  or  shall  we  consider  the  harmful  social  re- 
sults incident  to  such  use,  and  levy  rates  so  high  as  to 
prove  a  deterrent  to  consumption  ?  Shall  the  machinery 
of  government  be  used  as  a  means  for  the  readjustment 
of  the  inequalities  in  the  distribution  of  wealth  by  a 
graduated  income  and  inheritance  tax ;  or  shall  special 
legislation  be  carried  a  step  farther,  and  the  system  be 
used  for  the  suppression  of  such  articles  as  oleomarga- 


8  THE  INTERNAL   REVENUE  SYSTEM. 

rine  and  other  products  which  enter  into  competition 
with  protected  products  ?  These  are  but  a  few  of  the 
questions  which  present  themselves  at  a  time  when  the 
fiscal  relations  are  in  an  unsettled  state.  The  teachings 
of  the  past  will  aid  us  greatly  in  their  determination. 


TAXATION  AND  TAXES 


THE  UNITED  STATES  UNDER  THE  INTERNAL  REVENUE 
SYSTEM,  1791-1895. 


CHAPTER  I. 
EARLY    ATTEMPTS    AT    INTERNAL    TAXATION. 

The  immediate  cause  of  the  failure  of  the  Articles  of 
Confederation  was  a  fiscal  one,  and  lay  in  the  jealous 
restrictions  imposed  by  the  nascent  States  upon  the 
Continental  Congress.  All  power  to  tax  was  denied  the 
government.  Congress,  it  is  true,  possessed  ample  au- 
thority to  borrow  money,  but  was  intrusted  with  no 
power  to  provide  for  the  repayment  of  the  same,  save 
by  requisitions  upon  and  recommendations  to  the  indi- 
vidual States,  which  were  pledged  upon  their  public 
faith  to  obedience  to  the  same.  But  this  makeshift  of 
State  apportionments  had  early  failed  through  the  apa- 
thy of  the  State  governments,  relieved  of  the  bond  of 
common  danger,  and  oppressed  by  the  burdens  of  their 
own  local  indebtedness.  At  the  same  time  a  depreciated 
paper  currency,  issued  for  the  conduct  of  the  war,  had 
undermined  the  credit  of  the  government  both  at  home 
and  abroad ;  and  this,  together  with  the  failure  of  means 
to  meet  the  recurring  interest  charges  upon  the  public 


10  THE  INTERNAL   REVENUE  SYSTEM. 

debt,  left  no  avenue  of  escape  from  impending  bank- 
ruptcy, save  through  the  adoption  of  a  new  framework 
of  government,  or  the  granting  of  enlarged  powers  to 
the  Confederation. 

The  former  alternative  was  fortunately  chosen ;  and 
the  Constitution  of  1787  issued  from  the  hands  of  the 
Convention  liberal  in  its  grant  of  that  power  which  is 
fundamental  and  most  essential  to  any  form  of  sov- 
ereignty, namely,  the  power  of  taxation. 

By  the  provisions  of  this  instrument  the  customs  and 
excise  taxes  were  intrusted  to  the  new  federation,  while 
direct  taxes  were  sanctioned,  provided  they  were  appor- 
tioned among  the  several  States  according  to  their  re- 
spective numbers. 

Strange  as  it  may  seem,  that  section  of  the  Consti- 
tution which  empowers  Congress  "  to  lay  and  collect 
[Taxes,  Duties,  Imposts,  and  Excises"  was  enacted  with- 
Jout  opposition  or  discussion.  From  an  examination  of 
the  debates  of  the  Convention,  it  would  appear  that  this 
provision,  as  reported  by  the  committee  of  final  revision, 
was  taken  without  emendation  from  the  resolutions  said 
to  have  been  introduced  by  Charles  Pinckney ;  and  no 
exception  seems  to  have  been  raised  to  its  adoption.  In 
fact,  from  the  tone  of  the  discussions  and  the  dispropor- 
tionate amount  of  time  devoted  thereto,  it  would  ap- 
pear that  the  Convention  apprehended,  as  not  wholly 
improbable,  a  continuance  of  the  old  plan  of  raising 
revenues  by  means  of  requisitions  upon  the  States ;  for 
we  find  considerable  solicitude  manifested,  and  several 
resolutions  were  introduced  providing  that  all  moneys 
to  be  raised  for  supplying  the  public  Treasury  by  direct 
taxation  should   be  assessed  on  the  inhabitants  of  the 


EARLY  ATTEMPTS  AT  INTERNAL  TAXATION.      11 

several  States  according  to  the  number  of  their  repre- 
sentatives.1 

The  plan  of  direct  taxation  by  apportionment  Avas 
evidently  adopted,  with  but  little  appreciation  of  its 
import,  as  a  portion  of  one  of  the  famous  compromises 
of  the  Convention ;  yet,  even  with  this  safeguard  to  its 
use,  great  apprehension  was  manifested  lest  it  should 
be  made  use  of  by  Congress  to  the  prejudice  of  certain 
sections.     Soon,  however,  it  came  to  be  viewed  mainly 


1  Unfortunately,  the  journal  of  the  proceedings  of  the  Convention 
throws  but  little  light  upon  the  attitude  of  that  body  to  the  internal 
revenue  system,  or  as  to  what  was  to  constitute  "direct  taxation." 
It  appears  that  on  the  11th  of  July  there  was  a  debate  of  some 
warmth  involving  the  question  of  slavery;  and  on  the  day  following 
Gouverneur  Morris  of  New  York  submitted  a  proposition  "  that  taxa- 
tion shall  be  in  proportion  to  representation,"  which  was  passed  with 
the  insertion  of  the  word  "  direct,"  so  that  it  stood,  "  provided  always 
that  direct  taxes  ought  to  be  proportioned  to  representation."  — 
See  2  "Madison  Papers,"  by  Gilpin,  pp.  1079-1081. 

On  the  24th  of  the  same  month  Mr.  Morris  said  that  "  he  hoped 
the  committee  should  strikeout  the  whole  clause.  .  .  .  He  had  only 
meant  it  as  a  bWdge  to  assist  us  over  a  gulf;  having  passed  the  gulf, 
the  bridge  maybe  removed."  He  thought  the  principle  laid  down 
with  so  much  strictness  liable  to  strong  objections.  —  Ibid.,  p.  1197. 

That  gulf  was  the  share  of  representation  claimed  on  the  part  of 
the  South  for  their  slave  population.  But  the  bridge  remained,  and 
from  thenceforth  all  parties  seem  to  have  avoided  the  subject;  for, 
with  one  or  two  immaterial  exceptions,  it  does  not  appear  that  it  was 
again  adverted  to  in  the  Convention,  and  the  clause  was  silently 
incorporated  into  the  Constitution  as  that  instrument  was  finally 
adopted.  Nor  does  it  appear  that  on  the  floor  of  the  Convention 
any  attempt  was  made  to  define  the  words  used  or  the  exact  con- 
struction to  be  placed  upon  them. 

Under  the  Confederation,  requisitions  upon  the  States  were  col- 
lected by  State  officials,  upon  such  subjects  and  by  such  methods  as 
were  employed  in  the  individual  commonwealths.  Congress  came  in 
touch  only  with  the  States,  not  with  the  citizen. 

This  plan  persisted  in  the  Constitution  in  the  provision  relating  to 


12  THE  INTERNAL   REVENUE  SYSTEM. 

as  an  emergency  tax,  to  be  relied  on  only  in  case  of  the 
inadequacy  of  the  customs  and  the  excise.  Such  is 
the  opinion  generally  expressed  in  defence  of  the  Con- 
stitution by  pamphleteers  of  the  day.1 

That  the  time  would  come  when  wealth  would  be 
geographically  so  distributed  that  such  a  plan  would 
be  grossly  inequitable  does  not  seem  to  have  been  antici- 
pated, nor  is  there  any  indication  in  the  debates  of  the 
Convention  of  the  later  hostility  to  the  excise  or  internal 
i  revenue  system. 

With  the  organization  of  the  government  under  the 
new  instrument,  public  opinion  pointed  unequivocally 
to  Hamilton  as  the  Theseus  alone  capable  of  freeing 
the  chained  resources  of  the  country,  and  of  bringing 

direct  taxation,  in  so  far  as  it  substituted  for  the  rule  of  uniformity, 
which  prevailed  in  the  case  of  the  excise  and  impost,  that  of  appor- 
tionment upon  some  specified  basis;  but  as  to  what  was  included  in 
the  term  "  direct,"  within  the  intent  of  the  framers  of  the  Consti- 
tution, it  is  impossible  to  more  than  conjecture.  As  defined  by  the 
Supreme  Court,  in  the  several  cases  which  have  come  before  it  for  ad- 
judication prior  to  the  late  income-tax  case,  just  as  in  the  celebrated 
legal-tender  decisions,  historic  grounds  have  been  relied  on  so  far  as 
ascertainable ;  but,  in  the  light  of  the  vagueness  and  poverty  of  such 
knowledge,  the  decisions  have  turned  mainly  upon  a  prior!  mounds 
of  reasonableness  and  public  policy,  the  courts  holding  that  a  strict 
scientific  interpretation  of  the  term  "  direct "  would  be  repugnant  to 
reason,  and  would  enfeeble  the  Federal  Government,  and  have  arbi- 
trarily assumed  that  the  framers  of  the  Constitution  used  the  expres- 
sion inadvertently  and  without  fully  appreciating  its  consequences. 
For  this  reason  the  term  acquired  a  legal  meaning  unknown  to  the 
phraseology  of  finance  and  economics. 

1  See  Alexander  C.  Hanson  in  "  Pamphlets  on  the  Constitution, 
17S7-1788,"  edited  by  Paul  L.  Ford,  p.  253.  Also  pp.  160  and  303  of  the 
same.  See,  further,  the  assuaging  remarks  of  Hamilton  in  the  De- 
bates of  New  York  on  the  Adoption  of  the  Constitution,  "Elliot's 
Debates,"  vol.  ii..  p.  367.  (Pub.  by  Lippincott  &  Co.)  Also  State 
Papers,  Finance,  vol.  i..  p.  66,  "Report  on  the  Public  Credit." 


EARLY  ATTEMPTS  AT  INTERNAL  TAXATION.      13 

order  out  of  the  existing  fiscal  chaos ;  and  the  new- 
secretary,  when  invested  with  office,  speedily  indicated 
his  intention  to  utilize  to  the  fullest  the  generous  grant 
of  power  which  the  Constitution  conferred,  and  at  once 
introduced  measures  for  the  funding  of  the  public  debt, 
and  the  assumption  of  the  debts  of  the  States  incurred 
for  the  conduct  of  the  war,  for  the  authorization  of  a 
national  bank,  as  well  as  plans  for  an  adequate  revenue 
from  the  customs  and  the  excise.  Of  these,  the  prob- 
lem of  ways  and  means  was  by  far  the  most  pressing, 
and  various  forms  of  customs  duties  were  at  once 
proposed.  Madison  introduced  a  resolution  providing 
for  an  impost  somewhat  similar  to  the  one  so  warmly 
debated  by  the  Congress  of  the  Confederation  in  1783 ; 
but  it  did  not  meet  with  Hamilton's  approval,  who 
preferred  a  general  ad  valorem  duty  on  all  impor- 
tations, with  a  modest  excise  system  based  upon  wines 
and  spirits,  upon  which  objects  he  thought  it  would 
"be  sound  policy  to  carry  the  duties  as  high  as  will 
be  consistent  with  the  practicability  of  a  safe  collec- 
tion." x 

In  all  of  these  proposals  the  secretary  studiously 
avoided  innovations,  save  in  so  far  as  appeared  necessary 
to  accommodate  the  tried  experiments  of  older  countries 
to  colonial  conditions ;  and  his  several  reports  bear  evi- 
dence of  considerable  intimacy  with  the  current  financial 
theories  of  the  day,  while  the  resemblance  which  his 
suggestions  on  the  excise  bear  to  English  precedents 
can  hardly  be  considered  accidental.  In  this  latter 
regard  the  colonies  were  not  deficient  in  examples ;  for 
the  greatest  diversity  existed  in  the  revenue  systems 
1  State  Papers,  Finance,  vol.  i.,  p.  15. 


14  THE  INTERNAL   REVENUE   SYSTEM. 

of  the  various  States,  in  all  of  which,  however,  the 
birthmark  of  their  common  British  origin  is  apparent. 

This  diversity  has  persisted  to  the  present  day,  and  it 
is  only  possible  to  understand  the  inextricable  confusion 
and  hopeless  lack  of  scientific  principles  in  State  taxa- 
tion by  reference  to  the  economic  and  social  conditions 
under  which  they  came  into  being.  Some  form  of 
raising  funds  for  communal  purposes  doubtless  existed 
from  the  earliest  settlements ;  and,  save  in  a  few  in- 
stances, English  forms  and  methods  served  as  models. 
But  political  conditions  were  simple  in  the  extreme, 
and  the  demands  for  revenue  were  met  by  devices  cor- 
respondingly simple.  With  growth  in  the  complexity  of 
social  conditions,  however,  recourse  to  internal  sources 
was  rendered  necessary ;  and  the  more  palpable  forms  of 
property,  as  land,  horses,  cattle,  stock  in  trade,  house- 
hold plate  and  furniture,  and  other  tangible  and  easily 
ascertained  forms  of  wealth,  were  first  chosen  for  taxa- 
tion. Land  was,  of  course,  the  most  important,  as  well 
as  the  chief,  source  of  wealth,  and  in  all  the  States  save 
Vermont  and  Delaware  bore  the  main  burden  of  taxa- 
tion. Only  about  one-half  the  States  assessed  houses 
and  slaves;  while  carriages  were  taxed  in  Connecticut, 
New  Jersey,  Pennsylvania,  Virginia,  and  Kentucky, 
and  processes  of  law  in  Maryland,  Virginia,  Kentucky, 
and  North  Carolina.  Seven  of  the  States  clung  to  a 
uniform  capitation  tax,  four  imposed  the  general  prop- 
erty tax  upon  all  forms  of  wealth,  while  others  specifi- 
cally indicated  the  articles  to  be  taxed. 

To  a  limited  extent,  and  under  various  disguises,  the 
income  tax  was  imposed.  Vermont  provided  "for  as- 
sessments   proportional   to  the  profits    of   all    lawyers, 


EARLY  ATTEMPTS  AT  INTERNAL  TAXATION.      15 

traders,  and  owners  of  mills,  according  to  the  judg- 
ment and  discretion  of  the  listers  or  assessors ; "  while 
Massachusetts  taxed  "  incomes  from  any  profession, 
faculty,  handicraft,  trade,  or  employment."  A  similar 
tax  is  to  be  found  in  Connecticut,  to  be  "  proportioned 
to  the  estimated  gains  or  profits  arising  from  any,  and 
all,  lucrative  professions,  trades,  and  occupations,  ex- 
cepting compensations  to  public  offices,  the  profits  of 
husbandry,  and  common  labor  for  hire."  Pennsylvania, 
the  most  restive  of  the  States  under  taxation,  met  an 
early  requisition  of  the  Confederation  by  imposing  a 
duty  upon  all  profits  arising  from  offices  and  positions 
of  profit,  trades,  professions,  and  occupations.  Similar 
taxes  existed  in  Delaware  and  New  Jersey,  while  in 
several  Southern  States  rates  upon  certain  species  of 
property  were  estimated  upon  the  incomes  arising  from 
them.1 

In  a  highly  organized  community,  the  desire  to  dis- 
guise the  burdens  which  political  life  entails  has  led  to 
their  imposition  upon  exchange  in  the  form  of  license 
charges,  stamps,  and  various  forms  of  the  excise.  But 
for  many  years  what  internal  trade  existed  in  the  colo- 
nies was  conducted  almost  solely  by  barter.  Every 
household  was  a  community  unto  itself.  Its  meagre 
wants  were  supplied  on  the  spot.  By  slow  degrees, 
however,  through  the  introduction  of  money  and  the 
growth  of  manufactures  and  towns,  markets  were  cre- 
ated, and  the  exchange  of  commodities  was  facilitated. 

1  Cf  "Taxation  in  American  States  and  Cities,"  R.  T.  Ely,  Part 
II.,  chaps,  i.  and  ii. ;  also  "  Robert  Morris,  The  Financier  and 
Finances  of  the  American  Revolution,"  W.  G.  Sumner,  chap,  iii., 
et  seq. 


16  THE  INTERNAL   REVENUE  SYSTEM. 

Hand  in  hand  with  this  development  is  noticeable  an 
attempt  to  utilize  the  processes  of  exchange  for  the  pur- 
pose of  revenue,  and  at  the  time  of  the  Revolution  ex- 
cise taxes  had  been  developed  to  considerable  extent  in 
several  of  the  colonies.  In  Connecticut,  not  only  all 
ardent  spirits,  but  foreign  articles  of  consumption  gen- 
erally, had  been  the  objects  of  an  inland  duty.  In  New 
Hampshire,  rum,  wine,  and  cider  were  taxable ;  in  New 
York,  beer,  wine,  and  liquors  of  all  kinds  sold  at  re- 
tail, as  well  as  receipts  from  sales  at  auction.  Spirits 
were  also  taxable  in  New  Jersey  and  Pennsylvania. 
Five  of  the  colonies  were  thus  familiar  with  the  taxa- 
tion of  spirits  in  some  form  or  other,  but  it  appears  that 
the  taxes  were  very  unpopular  and  costly  of  collection. 
By  1796  they  had  apparently  been  relinquished  by  all 
of  the  States,  for  no  reference  to  them  is  to  be  found  in 
Wolcott's  report  of  that  year.1 

In  the  majority  of  the  Commonwealths  the  State  tax 
was  collected  from  the  same  objects  as  the  local  rates, 
while  in  a  few  the  revenues  from  certain  specified 
sources  were  reserved  exclusively  for  the  State  govern- 
ment. In  New  York,  Pennsylvania,  and  Maryland. 
however,  the  income  derived  from  the  sales  of  public 
lands  and  certain  other  independent  sources  relieved 
these  Commonwealths  from  the  necessity  of  any  resort 
to  taxation  for  purely  State  purposes. 

Prom  this  it  will  be  seen  that  the  proposals  of  Hamil- 
ton regarding  excise  taxes  were  drawn  in  great  part  from 
sources  familiar  to  the  people ;  and  the  legislation  which 

1  For  an  exhaustive  account  of  the  revenue  systems  in  vogue  in 
the  various  States,  see  "Wolcott's  Report,  State  Papers,  Finance, 
vol.  i.,  p.  414. 


EARLY  ATTEMPTS  AT  INTERNAL  TAX  A  TION.      17 

followed  therefrom  was  experimental  only  in  so  far  as 
it  applied  to  larger  areas  of  territory,  and  emanated 
from  a  new  and  heretofore  unrecognized  authority. 

In  one  of  his  first  reports,  Hamilton  had  advocated  a 
moderate  tax  upon  spirits  distilled  within  the  United 
States  from  foreign  as  well  as  domestic  materials ; x  but 
Congress  had  declined  to  follow  his  proposals  on  ac- 
count of  the  alleged  centralizing  tendencies  consequent 
on  the  creation  of  a  large  body  of  federal  tax  collectors. 
At  the  same  time  the  sectional  interests  of  the  Southern 
States,  with  which  Pennsylvania  was  closely  identified, 
united  their  representatives  in  Congress  in  denunciation 
of  the  proposed  measure,  as  one  that  was  "  odious,  un- 
equal, unpopular,  and  oppressive." 

This  aversion  to  internal  taxes  was  partly  traditional, 
partly  the  result  of  the  absence  of  legal  restraint  in 
those  isolated  regions  where  the  opposition  was  most 
intense.  In  the  South,  moreover,  whiskey  was  looked 
upon  almost  as  a  necessity,  and  a  tax  upon  its  manufac- 
ture and  sale  no  more  defensible  than  one  imposed  upon 
any  other  product  of  the  farm.  In  Pennsylvania,  also, 
the  feeling  was  most  bitter ;  and  the  legislature  of  that 
State  instructed  its  representatives  in  Congress  to  oppose 
the  passage  of  such  a  measure  by  every  means  in  their 
power,  while  a  memorial  from  Westmoreland  County 
(Pa.)  insisted,  among  other  things,  that  to  convert  grain 
into  spirits  was  as  clear  a  natural  right  as  to  convert 
grain  into  flour.  An  excise  "  was  the  horror  of  all  free 
states,"  said  one  vigorous  speaker  in  the  House ;  it 
was  "  hostile  to  the  liberties  of  the  people  ;  "  it  would 
"  convulse  the  government ;  let  loose  a  swarm  of  har- 
1  State  Papers,  Finance,  vol.  i.,  p.  23, 


18  THE  INTERNAL   REVENUE  SYSTEM. 

pies,  who,  under  the  denomination  of  revenue  officers, 
will  range  the  country,  prying  into  every  man's  house 
and  affairs,  and,  like  the  Macedonian  phalanx,  bear 
down  all  before  them."  * 

It  was  further  pointed  out  that  the  First  Provisional 
Congress,  assembled  in  Philadelphia  in  1774,  had  ad- 
dressed to  the  people  of  Canada  a  memorial  which  had 
instanced  the  English  excise  as  one  of  the  evils  atten- 
dant upon  continued  connection  with  the  mother  coun- 
try ; 2  as  well  as  the  provision  for  a  long  time  insisted 
on  in  the  Constitutional  Convention  of  New  York,  which 
denied  to  Congress  all  power  of  inland  taxation.3  Both 
Madison  and  Hamilton,  at  an  earlier  date,  had  avowed 
themselves  opposed  to  a  federal  excise ;  but  Hamilton, 
when  he  became  Secretary  of  the  Treasury,  was  led  to 
alter  his  views  from  the  inadequacy  of  the  other  forms 
of  revenue.  Already  tonnage  and  customs  duties  had 
been  provided  for,  which  were  estimated  to  yield 
$1,467,086,  which  sum  was  expected  to  be  increased 
to  $2,000,000  by  the  proposed  duties  upon  spirits.4 
The  estimated  annual  expenditures  of  the  new  gov- 
ernment included  $630,101  for  the  civil  establishment, 
while  the  accrued  and  accruing  interest,  with  overdue 
public  securities,  aggregated  $15,000,000  more.5 

It  soon  became  apparent  that  the  early  revenue  pro- 
visions were  inadequate ;  and  two  months  after  his  first 

1  Annals  of  Congress,  vol.  ii.,  p.  1844. 

2  Journal  of  Congress,  1777,  p.  62. 

3  Elliot's  "Debates,"  vol.  ii.,  p.  331-411. 

*  Hamilton  estimated  the  latter  duties  capable  of  yielding  $650,000, 
the  annual  production  of  spirits  at  this  time  being  approximately 
6,500,000  gallons. 

5  State  Papers,  Finance,  vol.  i.,  p.  12. 


EARL  Y  A  TTEMPTS  A  T  INTERNAL  TAX  A  TION.      19 

report,  Hamilton,  at  the  request  of  the  House,  made 
a  further  proposal *  on  means  for  meeting  the  interest 
charges  upon  the  debts  of  the  States  but  recently  as- 
sumed. In  this  report  the  secretary  deserted  his  early 
and  more  tentative  policy,  and  boldly  advocated  inland 
duties  upon  snuff  and  tobacco,  carriages,  sales  at  auction, 
stamps,  and  licenses  for  the  practice  of  law  and  the  priv- 
ilege of  selling  wines  and  spirits,  from  which  combined 
sources  he  conceived  that  half  a  million  dollars  could 
easily  be  realized.2  Again  in  December  he  reiterated 
his  proposals  regarding  the  fitness  of  spirits  for  taxa- 
tion; and  three  months  later,3  in  the  face  of  the  most 
vigorous  opposition,  his  proposals  were  substantially 
enacted  by  a  vote  of  thirty-nine  to  nineteen. 

By  the  provisions  of  this  Act  graduated  duties  were; 
levied,  which  increased  from  eleven  to  thirty  cents  per 
gallon  upon  spirits  distilled  from  molasses,  sugar,  and! 
other  foreign  materials,  according  to  the  proof  of  the 
article  as  measured  by  Dicas's  hydrometer.  Upon  spirits 
distilled  from  domestic  articles,  as  whiskey  distilled 
from  grain  within  any  city,  town,  or  village,  the  rates 
ranged  from  nine  to  twenty-five  cents. 

For  the  collection  of  the  duties  elaborate  provision 
was  made,  and  administrative  machinery  created,  which 
has  served  as  a  model  for  subsequent  acts.  The  tax 
was  required  to  be  paid  or  secured  prior  to  the  removal 
of  the  article  from  the  place  of  manufacture,  and  its 
collection  was  intrusted  to  the  supervisors  of  the  reve- 
nue. In  order  to  obviate  the  objection  frequently  made, 
that  the  tax  required  increased  capital  in  the  distilling 

i  On  March  4,  1790.  3  By  act  of  March  3,  1791, 

2  State  Papers,  Finance,  vol.  i.,  p.  43. 


20  THE  INTEENAL   REVENUE  SYSTEM. 

business,  an  option  was  granted  the  manufacturer  to  pay 
the  duty  upon  the  removal  of  the  spirits  from  the  place 
of  manufacture,  with  an  abatement  of  two  per  cent 
thereon,  or  to  give  bond  with  approved  securities  for 
its  payment  within  three  months  after  release  from  the 
manufactory. 

The  country  was  divided  into  fourteen  districts,  corre- 
sponding with  State  lines,  in  each  of  which  a  supervisor 
was  appointed ;  while  each  district  was  further  subdi- 
vided into  inspection  surveys,  with  as  many  inspectors 
in  each  as  were  deemed  necessary,  whose  duty  it  was 
to  attend  to  one  or  more  places  of  distillation.  The 
methods  adopted  for  checking  illicit  distillation  were 
quite  similar  to  those  now  in  use.  The  local  officer  was 
required  to  mark  and  brand  each  cask  in  durable  char- 
acters with  progressive  numbers,  as  well  as  with  the 
name  of  the  distiller  and  the  quantity  of  spirits  con- 
tained in  the  same.  This  was  intended  to  prevent  the 
re-use  of  packages,  and  the  marketing  of  spirits  without 
the  payment  of  the  duty. 

Upon  stills  located  in  the  country  districts  the  pro- 
ducer was  permitted  to  pay  "  a  yearly  duty  of  sixty 
cents  per  gallon,  English  wine  measures,  on  the  capa- 
city or  content  of  each  and  every  such  still,  including 
the  head  thereof."  And  if  any  distiller  felt  himself 
aggrieved  by  the  rates,  he  was  permitted  to  keep  a  rec- 
ord of  the  quantity  of  spirits  distilled  and  sold ;  which 
record,  when  produced  and  verified  before  the  officer  of 
the  survey,  was  to  be  accepted  as  true,  and  the  tax 
assessed  at  the  uniform  rate  of  nine  cents  per  gallon 
upon  the  verified  output.  The  net  product  of  the  Act 
was  further  pledged  to  the  foreign  loans,  and  was  to  be 


EARLY  ATTEMPTS  AT  INTERNAL  TAXATION.      21 

inviolably  applied  thereto,  while  any  unappropriated 
surplus  was  to  be  used  in  the  reduction  of  the  public 
debt. 

Although  the  rate  imposed  was  no  higher  than  that 
collected  by  Pennsylvania  a  few  years  earlier,  the  pro- 
ducers complained  that  it  was  excessive  and  prejudicial 
to  their  business ;  and  to  assuage  this  sentiment  several 
amendments  were  made  which  reduced  the  rates  twenty- 
five  per  cent  upon  stills  with  a  capacity  of  four  hundred 
gallons  or  more,  granted  country  producers  the  option  of 
taking  out  a  license  at  the  rate  of  ten  cents  per  gallon 
on  the  estimated  monthly  producing  capacity  of  the 
still,  or  of  paying  seven  cents  on  the  actual  amount 
produced,  or  of  paying  fifty-four  cents  on  the  annual 
content  of  the  still.  But  these  alternatives  were  soon 
found  prejudicial  to  the  revenues ;  for  by  the  use  of  im- 
proved methods  in  production,  and  the  forcing  of  the 
capacity  of  the  still,  distillers,  by  taking  out  a  monthly 
license,  were  able  to  reduce  the  per  gallon  tax  to  about 
three  cents,  while  a  few  years  later,  according  to  esti- 
mates of  Mr.  Gallatin,  the  gallon  rate  had  been  still 
further  diminished  to  about  three-fifths  of  a  cent.1 

But  despite  these  concessions  on  the  part  of  Congress, 
the  tax  remained  as  unpopular  as  ever  in  the  Middle 
and  Southern  States,  where  it  was  felt  that  it  had  been 
inspired  by  the  commercial  classes  of  New  England,  to 
whom  the  tariff  was  inimical,  and  who,  it  was  alleged, 
were  desirous  of  shifting  the  taxes  upon  the  defenceless 
population  of  the  interior.  Especially  strong  was  this 
sentiment  in  Western  Pennsylvania  and  in  the  moun- 
tainous districts  of  Kentucky,  Virginia,  and  North 
1  Report  on  Finances,  1801,  p.  314. 


22  THE   INTERNAL   REVENUE   SYSTEM. 

Carolina,  where  inadequate  facilities  for  transportation 
rendered  it  necessary  to  transform  grain  into  spirits  be- 
fore it  could  be  carried  to  an  Eastern  market,  and  where 
money  was  so  scarce  that  barter  was  the  prevailing 
means  of  exchange,  and  whiskey  the  recognized  measure 
of  value. 

It  is  difficult  to  appreciate  the  prevalent  hostility  to 
taxation  without  some  reference  to  the  political  and 
social  conditions  of  the  time.  The  prescience  of  Ham- 
ilton had  foreseen  that  nothing  would  so  surely  cement 
the  new  order  of  things  as  an  invigorating  financial 
policy,  and  his  opponents  were  no  less  quick  in  suspect- 
ing his  scheme  of  such  ulterior  purpose.  The  opposi- 
tion to  the  tax  measures,  as  well  as  to  the  Assumption, 
Funding,  and  Bank  Acts,  was  thus  largely  of  a  political 
nature.  Party  lines  were  just  forming;  and  the  Anti- 
Federalists  found  in  these  measures  opportunity  for 
arousing  the  latent  hostility  of  the  people  to  taxation  in 
any  form,  and  of  turning  the  proposals  of  the  Federalists 
to  political  advantage.  The  traditional  aversion  on  the 
part  of  the  colonists  to  excise  taxation  had  not  been 
abated  by  their  long  freedom  from  the  visits  of  the 
tax-gatherer,  and  excise  impositions  were  inseparably 
associated  in  their  minds  with  arbitrary  government. 
Anti-Federalist  orators,  therefore,  found  ready  listeners 
to  their  utterances,  particularly  in  the  rural  districts. 
This  disaffection  found  avidious  acceptance  in  the  west, 
ern  counties  of  Pennsylvania,  and  it  required  but  little 
agitation  to  arouse  the  feeling  into  hostile  opposition 
to  the  enforcement  of  the  Act.  Indignation  meetings 
were  held,  and  a  committee  of  agitation  in  Washington 
County  declared  that  any  one  who  would  accept  any 


EA  RL  Y  A  TTEMP  TS  A  T  INTERNAL  TAX  A  TION.      23 

position  under  the  law  would  be  considered  an  enemy 
of  society.  A  few  weeks  later  a  tax-collector  was  tarred 
and  feathered,  and  various  acts  of  violence  were  com- 
mitted on  other  officials.  Concessions  on  the  part  of 
Congress,  instead  of  abating  the  hostility,  only  rendered 
it  more  insolent.  Correspondence  committees  were  ap- 
pointed, resolutions  of  a  revolutionary  character  were 
passed,  and  even  secession  was  talked  of.  At  last  the 
hostility  was  fanned  into  armed  resistance  ;  and  although 
the  Whiskey  Insurrection,  as  it  is  known  to  history,  was 
easily  quelled,  the  hostility,  though  latent,  was  still  cher- 
ished by  the  inhabitants,  and  the  law  but  feebly  executed, 
while  the  revenues  derived  therefrom  were  insignificant. 
Thus  for  the  fiscal  year  1793-1794,  three  years  after 
the  inauguration  of  the  system,  the  aggregate  receipts 
were  but  $344,453,  or  $50,000  less  than  the  returns 
during  the  first  year  of  its  operation,  and  only  about 
one-half  of  its  estimated  yield.  The  tax  did  not  pos- 
sess the  approval  of  the  people,  evasion  was  justified  by 
public  opinion,  while  the  salaries  of  the  revenue  offi- 
cers were  so  inadequate  that  inefficient  men  were  often 
intrusted  with  the  administration  of  the  law. 

The  insurgents  had  the  sympathy  of  a  large  portion 
of  the  Union  ;  and  not  a  few  representatives  of  the  South 
openly  expressed  their  approval  of  their  acts,  finding 
therein  a  vindication  of  their  charges.  The  division  in 
Congress  was  largely  a  sectional  one,  the  Northern  States 
being  preponderatingly  in  favor  of  the  measure,  while 
the  Southern  ones,  with  Pennsylvania,  were  arrayed 
against  it.  The  lines  of  separation  were  therefore  polit- 
ical ;  and  while  the  constitutionality  of  the  measure  was  '• 
not  questioned,  the  same  tactics  and  arguments  were 


24  THE  INTERNAL   REVENUE  SYSTEM. 

adopted  which  were   directed   against  the   Assumption 
Bill  and  Bank  Act. 

But  the  necessities  of  the  Treasury  were  not  the  only 
motives  which  urged  the  secretary  to  adopt  his  fiscal 
policy.  They  may,  in  fact,  have  occupied  a  subordinate 
position  in  his  mind ;  for  he  doubtless  felt  the  necessity 
of  pre-empting  the  powers  conferred  upon  the  federal 
government  before  they  should  be  assumed  by  the  States 
themselves.  It  was  eminently  to  be  desired  that  the 
powers  conferred  upon  the  Union  should  be  utilized 
before  the  opposition  should  be  sufficiently  organized  to 
defeat  them.  If  inland  forms  of  taxation  were  once  as- 
sumed by  the  States,  it  would  be  Avell  nigh  impossible  to 
oust  them,  and  reclaim  the  same  for  the  federal  govern- 
ment.1 Moreover,  the  secretary  fully  appreciated  the 
effect  of  bringing  the  national  arm  into  daily  contact 
with  the  people ;  and  even  a  bloodless  war,  with  the  con- 
sequent display  of  armed  federalism  which  ensued,  may 
not  have  been  greeted  by  him  wholly  with  displeasure. 
The  contest  was  in  reality  but  one  phase  of  the  great 
constitutional  struggle  which  was  to  be  the  battle- 
ground for  the  next  seventy  years ;  and  while  individual 
opposition  partook  ver3r  largely  of  the  current  aversion 
to  visible  taxes,  in  Congress  the  battle  was  a  political 
one,  fought  along  the  lines  which  were  rapidly  cleaving 
the  country  into  two  great  camps.  The  arguments  pre- 
sented against  the  tax  appear  very  weak  and  pusillani- 
mous at  this  distance,  and  are  substantially  reducible 
to  four ;  to  wit,  first,  that  the  tendency  of  the  taxes 
was  to  contravene  the  principles  of  liberty ;  second, 
that  their  influence  was  to  injure  morals  by  inducing 
1  Cf  Hamilton's  "Works,"  vol.  iv.,  p.  231. 


EARLY  ATTEMPTS  AT  INTERNAL  TAXATION.      25 

false  swearing  ;  third,  that  they  were  burdensome  to  the 
public  on  account  of  the  heavy  and  oppressive  penalties ; 
and  fourth,  that  their  tendency  was  to  interfere  unduly 
with  industry  and  the  process  of  distilling.  Hamilton 
disposed  of  these  objections  seriatim,  and  demonstrated 
their  falsity,  showing  that  the  measure  erred  rather  in 
leniency  than  severity,  while  it  bore  but  little  resem- 
blance to  the  English  excise  with  which  the  opponents 
were  wont  to  compare  it,  and  which  caused  it  to  inspire 
so  much  fear  in  the  public  mind. 

But  comparatively  little  relief  was  afforded  the  Treas- 
ury from  this  source.  For  the  fiscal  year  1793  the  total 
receipts  amounted  to  but  $422,026.86,  distributed  accord- 
ing to  assessment  districts  as  follows  :  — 


Collections  from  Distilled  Spirits  for  the  Fiscal  Year  1793. 


DISTRICT. 

New  Hampshire 
Massachusetts 
Rhode  Island 
Connecticut  . 
Vermont   .     . 
New  York     . 
New  Jersey  . 
Pennsylvania 1 
Delaware  .     . 
Maryland  .     . 
Virginia    .     . 
North  Carolina 
South  Carolina 
Georgia     .     . 


GROSS  AMOUNT  OP 
EEVENCE  Fr.OM   SPIEITS 

PRODUCED  FEOM 
DOMESTIC  MATERIALS. 

$   209.78 

990.61 

43.20 

3,330.71 

564.54 

860.00 

14,975.40 

1,691.89 
14,708.62 
76,268.30 
12,734.81 

7,547.00 
640.46 

$134,565.32 


GEOSS  AMOUNT  OF 
REVENUE  FEOM  SPIEIT8 

PEODDCED  FEOM 
FOBEIGN   MATEE1AL8. 

$     3,413.89 

185,208.91 

46,795.57 

8,082.36 

27,204.15 

999.84 

4,099.30 

6,438.12 

2,021.90 

8.10 

3,189.38 

$287,461.54 


1  No  returns  were  secured  from  Pennsylvania  from  the  country 
districts,  where  distillation  from  domestic  materials  was  mainly 
carried  on. 


26  THE  INTERNAL   REVENUE  SYSTEM. 

The  cost  of  returning  this  sum  to  the  Treasury  was 
something  less  than  $70,000,  or  about  16.5  per  cent, 
while  the  drawbacks  allowed  aggregated  $60,000  more, 
so  that  the  expense  of  netting  $292,000  to  the  Govern- 
ment was  upwards  of  20  per  cent  of  the  gross  amount, 
and  23.5  per  cent  of  the  sum  actually  secured.1  Such 
a  showing  gave  much  countenance  to  the  charges  fre- 
quently made  that  the  costliness  of  the  tax  of  itself 
rendered  it  untenable. 

But  its  continuance  was  demanded  by  the  exigencies 
of  the  situation.  In  fact,  a  proposition  was  at  that  time 
pending  before  the  House  for  rendering  dutiable  car- 
riages, sales  at  auction,  snuff,  sugar,  tobacco,  licenses 
for  selling  wines  and  liquors,  and  a  schedule  of  stamp 
duties,  by  which,  if  adopted,  the  revenues  were  expected 
to  be  augmented  by  about  $600,000 ; 2  and  these  pro- 
posals, in  the  face  of  strong  opposition  on  the  part  of 
the  manufacturing  interests,  were  finally  incorporated 
into  a  measure  bearing  date  of  June  5,  1794. 

By  the  provisions  of  this  Act  the  duty  upon  carriages 
was  graduated  from  one  to  ten  dollars  according  to  the 
description  of  the  vehicle ;  but  its  operation  was  limited 
to  carriages  kept  exclusively  for  pleasure,  a  provision 
which  greatly  impaired  its  collection.  Subsequently, 
by  the  Act  of  May  28,  1796,  the  rates  were  consider- 
ably increased,  and  given  the  following  permanent 
form  :  — 

Coaches  driven  by  postilions $15.00 

Chariots 12.00 

Coaches  (with  panels) 9.00 

1  State  Papers,  Finance,  vol.  i.,  p.  279. 

2  Ibid.,  p.  276.    April  17, 1794. 


EARLY  ATTEMPTS  AT  INTERNAL  TAXATION.      27 

Coaches  (without  panels) $6.00 

Two-wheeled  top  carriages 3.00 

Other  two-wheeled  carriages 2.00 

The  tax  was  at  once  attacked  as  unconstitutional,  on  | 
the  ground  that  the  duty,  unlike  all  other  indirect  taxes, 
was  not  paid  once  for  all,  but  annually  like  any  other 
tax  on  personalty  or  real  property.  Moreover,  it  was  I 
paid  originally  by  him  on  whom  it  eventually  fell,  in-  I 
stead  of  by  the  producer,  from  whom  it  was  to  be  shifted*-/ 
to  the  consumer.  For  these  reasons  it  was  held  to  be  a 
direct  tax  instead  of  an  indirect  one,  and  consequently, 
according  to  the  provisions  of  the  Constitution,  could 
only  be  assessed  by  apportionment  among  the  States 
according  to  the  distribution  of  population.  From  a 
purely  administrative  point  of  view  the  tax  is  to  be 
classed  as  a  direct  one  ;  but  Gallatin  tried  to  evade  the 
objection  by  asserting  that  it  fell  upon  an  article  of 
expense  rather  than  an  article  of  income,1  while  the 
Supreme  Court 2  sustained  the  constitutionality  of  the 
law  on  the  ground  that  only  land  and  capitation  taxes 
were  to  be  regarded  as  direct  within  the  purview  of  the 
Constitution,  and  that  it  was  inconceivable  that  the 
frainers  of  the  Constitution  should  have  contemplated 
a  restriction  of  the  federal  powers  of  internal  direct 
taxation  solely  to  those  two  objects.3 

1  Writings  of  Gallatin  (Adams),  vol.  iii.,  p.  95. 

2  Hylton  vs.  the  United  States,  3  Dallas,  971. 

3  The  real  intent  of  this  provision  of  the  Constitution,  like  many 
others,  will  always  he  an  open  question.  Prohably  the  two  most 
authoritative  persons  in  the  Convention  touching  the  Constitution 
were  Hamilton  and  Madison,  and  they  disagree.  The  hitter,  in  a 
letter  of  May  11,  1794,  speaking  of  the  carriage  tax,  said,  "  The  tax  on 
carriages  succeeded  in  spite  of  the  Constitution  by  a  majority  of 


28  THE  INTERNAL   REVENUE  SYSTEM. 

By  the  terms  of  the  Act  of  June  5,  1794  a  percentage 
tax,  varying  according  to  the  description  of  the  prop- 
erty sold,  was  also  imposed  upon  all  sales  at  auction ; * 

twenty,  the  advocates  of  the  principle  heing  re-enforced  by  the 
adversaries  of  luxury."  (2  Madison's  "  Writings,"  pub.  by  Congress, 
p.  14.)  In  another  letter,  of  Feb.  7,  1796,  referring  to  the  carriage-tax 
case,  at  that  time  pending  in  the  Supreme  Court,  he  remarked: 
"  There  never  was  a  question  on  which  my  mind  was  better  satisfied, 
and  yet  I  have  very  little  expectation  that  it  will  be  viewed  in  the 
same  light  by  the  court  that  it  is  by  me."    Ibid.,  p.  77. 

Hamilton  also  left  some  words  upon  the  same  subject,  in  a  legal 
brief  entitled  "  Carriage  Tax,"  prepared  for  the  Hylton  ease,  in  which 
he  appeared  as  counsel  for  the  United  States.  In  it  he  says,  "  What 
is  the  distinction  between  direct  and  indirect  taxes?  It  is  a  matter 
of  regret  that  terms  so  uncertain  and  vague  in  so  important  a  point 
are  to  be  found  in  the  Constitution.  We  shall  seek  in  vain  any  ante- 
cedent settled  legal  meaning  to  the  respective  terms.  There  is  none. 
We  shall  be  as  much  at  a  loss  to  find  any  definition  of  either  which 
can  satisfactorily  settle  the  point."  Hamilton's  "  Works,"  vol.  vii., 
p.  848. 

There  being  many  carriages  in  some  States,  and  but  few  in  others, 
he  points  out  the  preposterous  consequences  of  levying  and  collecting 
the  tax  upon  the  basis  of  apportionment,  instead  of  by  the  rule  of  uni- 
formity, and  suggests  that  direct  taxes  be  held  to  be  only  "  capitation 
or  poll  taxes,  and  taxes  on  lands  and  buildings,  and  general  assessments, 
whether  on  the  whole  property  of  individuals,  or  on  their  whole  real 
or  personal  estate.  All  else  must  of  necessity  be  considered  as  in- 
direct taxes."  In  the  case  arising  under  the  carriage  tax,  the  plaintiff 
in  error  insisted  that  the  tax  was  unconstitutional  because  it  was  a 
direct  tax,  and  had  not  been  apportioned  among  the  States  as  pre- 
scribed by  the  Constitution.  The  argument  was  heard  by  four  judges, 
Wilson,  Patterson,  Chase,  and  Iredell,  of  whom  the  three  first  named 
had  been  distinguished  members  of  the  Constitutional  Convention  of 
1787.  Wilson  had  been  on  the  committee  that  drafted  the  instrument 
in  its  final  form,  and  had  been  its  defender  in  Pennsylvania.  The 
judges  were  unanimous  in  their  decision,  and  the  tax  was  held  not  to 
be  a  direct  one  in  the  meaning  of  the  Constitution.  Each  judge 
delivered  a  separate  opinion  sustaining  the  tax. 

1  The  tax  rates  upon  sales  at  auction  were  as  follows:  receipts 
from  sales  of  lands,  tenements  and  hereditaments,  tools,  stock,  and 


EARLY  ATTEMPTS  AT  INTERNAL  TAXATION.      29 

while  the  privilege  of  selling  foreign  spirituous  liquors 
at  retail  was  rendered  taxable  at  the  rate  of  five  dollars 
upon  every  such  place  of  business.  Sugar  and  snuff 
were  also  included  in  the  schedule,  the  tax  upon  the 
former  article  being  laid  on  the  ground  that  the  pro- 
tection granted  the  industry  by  the  tariff  was  a  bonus 
for  which  the  manufacturers  could  easily  afford  to  pay 
the  slight  tax  imposed.  The  tariff  duties  on  sugar 
ranged  from  one  and  a  half  to  nine  per  cent  ad  valorem, 
graded  according  to  the  value  of  the  product;  and  the 
internal  tax,  which  was  assessed  at  the  place  of  manu- 
facture, was  placed  at  two  cents  per  pound.  The  do- 
mestic manufacturers  vigorously  protested  against  the 
measure,  asserting  that  their  industry  was  so  newly 
established  and  in  such  a  struggling  condition  that  the 
tax  would  prove  ruinous  to  them ;  but,  despite  their  as- 
sertions, the  industry  steadily  increased  in  importance, 
and  maintained  the  market  against  foreign  competition. 
The  duty  on  snuff,  at  first  a  specific  tax  at  the  rate 
of  eight  cents  per  pound,  was  later  assessed  on  the 
capacity  of  the  mill,  as  measured  by  the  mortars  em- 
ployed in  its  production,  in  accordance  with  a  suggestion 
of  the  secretary ;  but  it  scarcely  paid  for  the  cost  of 
collection  and  the  drawback  of  six  cents  per  pound 
allowed  on  exportation.     It  was  soon  seen  to  have  been 


utensils,  one-fourth  of  one  per  cent;  while  the  receipts  from  sales 
of  goods,  chattels,  and  other  personal  property,  were  dutiable  at  one- 
half  of  one  per  cent.  The  administrative  difficulties  which  surround 
such  a  tax  render  it  difficult  of  collection,  as  its  assessment  depends 
wholly  upon  the  honesty  of  the  auctioneer.  In  addition  to  this,  it 
was  very  unpopular;  as  it  was  imposed  upon  articles  usually  sold 
under  the  pressure  of  misfortune,  although  it  did  not  attach  to  goods 
sold  upon  execution,  bankruptcy,  etc. 


30  THE  INTERNAL   REVENUE  SYSTEM 

ill  advised,  and  was  repealed,  after  having  been  collected 
but  twice,  namely,  in  1795  and  1796. 

Three  years  later 1  taxes  were  levied  upon  the  follow- 
ing legal  instruments,  and  were  collected  by  means  of 
stamps  :  — 

Certificate  of  admission  to  practice  in  U.  S.  Courts    .    §10.00 

Certificate  of  Naturalization 5.00 

Any  grant  under  the  seal  of  the  United  States  .     .     .         4.00 

Any  exemplified  copy  of  same 2.00 

Charter  party,  bottomry,  or  respondentia  hond  .  .  .  1.00 
Any  paper  requiring  seal  of  United  States     ....  .50 

Any  instrument  connected  with  the  ~|  From  10  cents  to  75  cents, 
execution  of  a  will ;  any  insurance  I  according  to  the  charac- 
policy;  all  bonds,  notes,  bills, etc.    J  ter  of  the  instrument. 

Everything  considered,  these  duties  were  probably  as 
satisfactory  as  any  portion  of  the  system,  inasmuch  as 
they  are  a  perfectly  legitimate  charge  for  services  ren- 
dered; while  at  the  same  time  they  are  easy  of  adminis- 
tration, cheap  of  collection,  and,  with  the  exception  of 
distilled  spirits,  the  most  productive  form  of  revenue 
imposed  during  this  period.  But  the  aid  secured  from 
these  taxes  did  not  justify  the  sanguine  hopes  of  the 
secretary  and  Congress,  who  looked  for  an  immediate 
return  of  more  than  half  a  million  dollars  from  the  com- 
bined sources.  The  real  collections  will  be  found  in 
table  as  footnote  on  opposite  page. 

As  early  as  1791  a  special  Committee  on  the  public 
credit  had  advocated  a  direct  tax  of  $750,000  to  be 
levied  upon  land,  but  Congress  declined  to  follow  the 
recommendation.2    Two  years  later,  the  finances  remain- 

1  Act  of  Dec.  15,  1797.  The  Act  was  amended  March  19, 1798,  and 
Feb.  28,  1799. 

2  State  Papers,  Finance,  vol.  i.,  p.  276. 


EA  RL  Y  A  TTEMPT8  A T  INTERNAL  TAXATION.      31 

ing  unimproved,  and  the  prospect  of  foreign  invasion 
appearing  ominously  on  the  horizon,  the  Committee  of 
Ways  and  Means,  "  in  view  of  the  existing  and  approach- 
ing exigencies,"  repeated  the  recommendations  of  the 
former  committee,  emphasized  as  they  were  by  the  con- 
tinued inadequacy  of  the  internal  revenue  receipts,  and 
advised  the  imposition  of  a  direct  tax  of  §2,000,000,  to 
be  apportioned  among  the  States  according  to  the  consti- 
stitutional  requirements,  and  requested  the  secretary  to 
present  a  report  upon  the  subject  at  the  next  session  of 
Congress.1 

In  December  of  the  same  year  Secretary  Wolcott 
complied  with  the  request,  and  included  in  his  report 
a  description  of  the  various  systems  of  raising  revenue 
in  operation  in  the  several  States.  These  varied  so 
widely,  both  in  the  objects  chosen  for  taxation,  as  well 
as  in  the  methods  of  administration  and  collection  em- 
ployed, that  the  secretary  felt  it  would  be  imprac- 
ticable to  co-ordinate  any  federal  system  with  them. 
He  therefore  advised  that  any  new  direct  taxes  should 
ignore  the  State  systems,  and  be  wholly  independent  of 

1  State  Papers,  Finance,  vol.  i.,  p.  409. 


EST. 
REV- 
ENUE. 


ACTUAL  RECEIPTS. 


1795.    1796.    1797.    1798.      1799.      1800 


Carriages  .... 
Stamps  .... 
Sales  at  auction  . 
Manufactured  to- 
baccos and  snuff, 

Sugar    

License     .    .    .    . 


5 
150,000 
100,000 
100,000 

100,01)0 

50,000 
100,000 


41,421 

31,593 

9,556 
33,812 
54,732 


40,790 


72,336 


43,109 

17,405 
63,752 
63,764 


37,996 


74,290 
30,515 


79,482 
273,181 
46,135 


} 
77,781 
232,170 
51,650 


58,921 
63,862 


54,651 
64,823 


55,272 
60,434 


65,240 
65,159 


32  THE  INTERNAL   REVENUE  SYSTEM. 

them.  The  suggestion  was  most  unfortunate,  for  to  its 
adoption  is  attributable  much  of  the  unpopularity  of  the 
tax.  The  public  would  not  brook  a  system  which  en- 
tailed a  new  body  of  tax-officials,  and  created  a  new  and 
possibly  permanent  system  of  direct  taxation. 

In  this  report  the  secretary  took  occasion  to  review 
taxes  upon  capital,  agriculture,  and  profits,  as  well  as 
those  upon  houses  and  lands  and  the  capitation  tax, 
with  the  result  that  the  first  three  were  rejected  by 
him,  because  to  tax  interest  and  profits  would  tend  to 
drive  capital  from  the  country,  while  a  tax  upon  agricul- 
ture would  not  be  endured,  because  it  discriminated 
against  that  industry.  The  capitation  tax,  on  the  other 
hand,  although  of  wide  prevalence  among  the  individual 
States,  would  operate  to  raise  wages,  and  thus  discour- 
age industry,  "contrary  to  the  policy  of  the  United 
States."  Houses  and  land  thus  became  the  only  avail- 
able bases  of  the  tax ;  the  former  commending  itself 
to  the  secretary,  because  "there  is  no  single  criterion 
by  which  the  comparative  expenses  of  individuals  can 
be  so  fairly  estimated  as  by  their  dwellings,"  while 
slaves  were  to  be  included  in  the  assessment,  to  be 
taxed  at  one  uniform  rate,  on  the  ground  that  their 
exemption  would  be  an  unjust  discrimination  against 
Northern  land-owners.  Moreover,  slaves  were  looked 
upon  as  fixtures  in  the  eyes  of  the  law,  and  part  and 
parcel  of  the  realty  and  inseparable  therefrom.  As 
against  land  no  reasonable  objection  could  be  urged,  and 
the  secretary  therefore  proposed  to  render  it  taxable  at 
a  uniform  ad  valorem  rate.1 

During  the  debates  in  Congress,  the  house-tax  under- 
i  State  Papers,  vol.  vii.,  p.  440. 


EARL  Y  A  TTEMP  TS  AT  INTERNAL  TAX  A  TIOX.      33 

went  considerable  modification.  The  secretary,  in  his 
first  report,  had  advised  the  division  of  all  houses 
into  three  general  classes ;  but,  as  finally  engrossed,  the . 
measure  provided  for  a  division  into  nine  classes,  rated 
according  to  value,  and  assessable  at  an  advancing  rate 
as  follows  :  *  — 

HOUSES  VALUED  FROM  -  T°  BE  TAXE°  AT  «""»»««>  EATE 

PEE  DOLLAK  OF  VALTTE. 

$     100  to  $     500 002 

500  to      1,000 003 

1,000  to      3,000 004 

3,000  to      6,000 005 

6,000  to    10,000 006 

10,000  to    15,000 007 

15,000  to    20,000 008 

20,000  to    30,000 009 

30,000  and  upwards 010 

In  the  assessment,  houses  and  lands  were  to  be  valued 
separately,  so  that  the  tax  upon  the  former  became  in 
effect  not  unlike  the  French  Vimpot  mobilier,  or  tax  on 
rentals,  as  enacted  by  the  Constituent  Assembly  of  1791. 
The  greater  part  of  the  yield  was  expected  to  be  pro- 
duced from  this  source;  it  being  estimated  that  houses 
would  return  §1,315,000,  slaves  $228,000,  while  the  bal- 
ance, $457,000,  was  to  be  raised  from  an  ad  valorem 
rate  upon  land.  The  burden  of  the  tax  was  thus  to  be 
cast  upon  houses ;  but,  as  a  matter  of  fact,  the  return 
from  this  source  was  comparatively  insignificant,  the 
tax  being  shifted  quite  generally  to  land.  Only  one 
assessment  was  made  under  the  law  in  1801;  and  the 
collections  proved  inconsiderable,  only  $734,223  being 

1  Act  of  July  14,  1798.  This  division  differs  from  the  suggestion 
of  Secretary  AYolcott,  which  provided  for  specific  taxes  from  50  cents 
per  house  on  Class  I.  to  $120.00  on  Class  IX. 


34  TUE  INTERNAL   REVENUE  SYSTEM. 

realized,  although  receipts  from  this  source  continued 
to  form  a  budgeta^  item  as  late  as  1813. 

The  advent  of  the  Democratic  party  to  power  in  1801 
was  signalized  by  the  complete  abolition  of  all  of  the 
taxes  so  laboriously  established  by  Hamilton  and  his 
successor.  Jefferson  had  openly  stigmatized  the  excise 
system  as  an  "infernal  one,"  and  likely  to  conduce  to 
the  dismemberment  of  the  "Union,  while  the  party  of 
which  he  was  the  chief  was  avowedly  pledged  to  its 
abolition.  At  the  first  session  of  Congress,  the  Ways 
and  Means  Committee  reported  against  its  continuance. 
Such  an  iniquitous  system,  said  the  committee,  could 
only  be  justified  by  "  imperious  necessity,"  —  a  necessity 
which  at  that  time  did  not  exist,  nor  was  it  likely  there- 
after to  exist.  Its  repeal  was  further  urged,  first,  be- 
cause of  -the  vexation  and  oppression"  of  many  of  the 
taxes,  some  of  them  being  especially  obnoxious  to  the 
people ;  second,  because  of  the  essential  "  nature  of  an 
excise,  which  is  hostile  to  the  genius  of  r>  free  people ; " 
while,  if  further  reasons  were  needed,  its •  retention  was 
inadvisable  because  of  its  "tendency  to  multiply  offices 
and  increase  the  patronage  of  the  Executive."' 1  At  this 
time  its  administration  supported  four  hundred  officials 
at  the  public  charge,  while  the  cost  of  returning  the  re- 
ceipts into  the  Treasury  was  nearly  twenty  per  cent,  the 
charges  for  the  fiscal  year  1800  exceeding  8103,000. 

In  conformity  with  the  recommendations  of  the  com- 
mittee, the  excise  and  direct  taxes  were  repealed  early  in 
1802 ; 2  and  from  this  time  down  to  the  outbreak  of  the 
War  of  1812.  no  recourse  to  any  form  of  internal  revenue 
seems  to  have  been  contemplated  by  either  party. 

l  State  Papers,  vol.  vii..  p.  735.  -  Act  of  April  6,  1802. 


}■:,  t  RL  Y  A  TTEMP  TS  A  T  INTERNA  L  TAX  A  TION.      35 

It  is  somewhat  difficult  to  appreciate  at  this  distance, 
in  view  of  the  multifarious  agencies  of  government 
which  interfere  with  the  individual  in  the  acquisition 
and  enjoyment  of  his  wealth,  through  the  official  inter- 
vention of  the  tax-gatherer,  the  well-nigh  universal 
aversion  which  existed  in  the  mind  of  the  early  citizen 
to  taxation  in  any  tangible  form. 

Yet  there  is  much  to  be  said  in  extenuation  of  this 
hostility.  It  is  to  be  remembered  that  our  States  did 
not  spring  full-grown  into  life.  The  taxing  systems  of 
to-day  are  the  results  of  painful  experimentation.  At 
this  period  society,  in  any  organized  political  sense,  had 
scarcely  emerged ;  and  the  settlers,  residing  on  isolated 
farms  or  in  small  communities,  knew  but  little  of,  and 
cared  less  for,  political  association.  To  them  the  idea  of 
the  State  meant  but  little.  They  had  hewn  their  own 
settlement,  and  enforced  the  only  law  they  knew,  un- 
aided by  that  which  in  more  advanced  communities  is 
man's  chief  servant,  not  only  of  protection,  but  of  pro- 
duction as  well.  Any  government,  therefore,  which 
assumed  the  form  of  taxation  was  to  the  pioneer  an 
unmixed  evil,  and  "  hands  off  "  was  the  sole  demand  of 
these  children  of  the  frontier.  The  direct  tax  espe- 
cially struck  at  the  settler's  home,  "  an  Englishman's 
castle ;  "  and  every  citizen  felt  that  he  was  defending 
his  birthright  in  resenting  the  intrusion.  The  federal 
arm  reached  his  distant  retreat  only  in  the  form  of  the 
exciseman,  a  name  of  itself  odious  to  one  of  English 
descent.  Moreover,  in  shaking  off  the  mother  country 
the  colonist  felt  that  he  had  done  with  the  publican 
forever,  and  for  many  years  he  had  been  free  from  his 
visits.     The  direct  tax  also  provided  for  the  measure- 


36  THE  INTERNAL   REVENUE  SYSTEM. 

ment  of  windows ;  and  visions  of  the  hated  window-tax 
arose  in  the  settler's  mind,  —  a  name  as  odious  to  one  of 
Irish  descent,  which  nationality  was  predominant  in  west- 
ern Pennsylvania,  as  the  famous  Battle  of  the  Boyne. 

Moreover,  in  any  new  and  undeveloped  country, 
money  is  scarce,  credit  has  little  or  no  existence,  ex- 
change is  confined  to  the  simplest  forms  of  transactions, 
and  barter  forms  the  common  means  of  transfer.  A 
duty  payable  in  currency  is  likely  to  be  a  source  of 
great  annoyance,  and  is  ofttimes  difficult  of  payment. 
One  cannot  read  the  memorials  addressed  to  Congress, 
without  being  impressed  with  the  feeling  that  this  inva- 
sion by  the  government  was  a  real  grievance,  and,  in 
the  eyes  of  the  people  a  new  form  of  usurpation  of  the 
freedom  so  recently  gained,  and  for  which  they  had 
so  valiantly  fought. 

At  the  same  time,  the  administration  of  the  system 
was  inefficient,  and  the  officials  frequently  venal.  Em- 
bezzlement was  not  infrequent,  and  fraudulent  returns 
diminished  the  revenues.  The  inadequate  compensa- 
tion offered  failed  to  secure  competent  men  for  the  ser- 
vice, and  this  tainted  it  with  additional  odium  in  the 
eyes  of  the  people.  For  these  reasons  the  excise  proved 
much  less  productive  than  had  been  anticipated  by  its 
advocates.  Thus  the  direct  tax  yielded  but  one-third 
what  it  had  been  expected  to  produce.  The  same  was 
true  of  the  other  taxes,  while  the  cost  of  collection  was 
excessive.  That  a  tax  shall  take  and  keep  out  of  the 
pockets  of  the  people  as  little  as  possible  over  and  above 
what  it  turns  into  the  treasury  is  one  of  the  first  can- 
ons by  which  its  availability  is  to  be  judged ;  and,  meas- 
ured  by    this    requirement,    the    excise    was    scarcely 


EABLY  A  TTEMPTS  A  T  INTERNA  L  TAX  A  TION.      37 

defensible.  Thus,  in  1795  it  cost  nearly  twenty-five  per 
cent  *  to  transfer  the  proceeds  of  the  levy  into  the  Treas- 
ury; but  from  this  time  on,  down  to  the  repeal  of  the 
system  in  1802,  the  cost  of  collection  steadily  dimin- 
ished, owing  to  the  improvement  in  the  methods  of  col- 
lection and  the  growing  acquiescence  of  the  people  in 
the  taxes.  Thus,  while  it  cost  $84,973  to  net  to  the 
Treasury  $531,269  in  1795,  in  1800,  $993,659  was 
returned  at  a  cost  of  but  $103,785 ;  while,  during  the 
War  of  1812,  the  cost  of  collecting  practically  the  same 
taxes  was  reduced  to  less  than  five  per  cent.2 

The  experience  recounted  in  this  chapter  is  mainly 
interesting  as  indicative  of  the  spirit  of  independence 
and  resistance  to  federal  encroachment  which  character- 
ized America  of  that  day;  for,  from  a  fiscal  point  of  view, 
the  system  was  purely  tentative.  But  it  was  upon  this 
foundation  that  the  excise  systems  of  1814  and  1862 
were  later  erected  ;  and  the  taxes  which  aroused  so  much 
hostility  in  the  days  of  the  nation's  infancy,  at  a  later 
date  came  to  form  the  groundwork  of  the  system  under 
which  we  are  now  living.  The  theory  that  luxuries  are 
best  fitted  for  internal  taxation  has  been  followed 
consistently  from  that  day  to  this ;  and  distilled  spirits 
have  become  the  most  productive,  if  not  the  most  popu- 
lar, source  of  revenue  upon  the  whole  schedule  of  taxes. 

It  required  a  severe  training  in  patriotism,  however, 
to  secure  this  indorsement  from  the  people,  and  the 


1  The  cost  of  collecting  the  duty  on  spirits  of  domestic  production 
was  34  per  cent,  and  of  foreign  production  14.5  per  cent.  This  is  an 
estimate  made  by  Gallatin. 

2  The  cost  of  collecting  the  internal  taxes  in  1891  was  hut  2.8  per 
cent. 


132B34 


38  THE  INTERNAL   REVENUE  SYSTEM. 

early  efforts  of  the  Federalist  party  were  wanting 
mainly  in  popular  approval;  and  the  persistency  with 
which  it  clung  to  its  policy,  even  in  the  face  of  almost 
universal  hostility,  was  one  of  the  main  causes,  as  Hil- 
dreth  has  said,  which  brought  about  the  downfall  of  that 
party. 


EMERGENCY  SYSTEM   OF  THE    WAR    OF  1812.      39 


CHAPTEK  II. 
THE    EMERGENCY    SYSTEM    OP    THE    WAR    OP    1812. 

From  the  repeal  of  the  system  so  laboriously  con- 
structed by  Hamilton  and  his  successors,  down  to  the 
War  of  1812,  no  recourse  to  internal  taxes  seems  to  have 
been  contemplated  by  the  party  in  power.  The  govern- 
ment was  frugally  administered ;  and  the  customs,  re- 
ceipts from  the  sales  of  public  lands,  and  the  arrearages 
of  the  direct  taxes,  amply  sufficed  for  all  demands  of  the 
Treasury.  The  public  debt,  which  had  been  temporarily 
augmented  by  the  purchase  of  Louisiana  to  .$80,691,120, 
was  steadily  reduced,  to  the  great  improvement  of  the 
public  credit,  which  at  the  renewal  of  hostilities  ap- 
peared well-nigh  impregnable.  This  gratifying  condi- 
tion of  the  finances  induced  a  false  feeling  of  security 
in  the  public  mind,  which  the  reports  of  the  Secretary 
of  the  Treasury  did  not  tend  to  allay.  As  early  as  1807, 
Gallatin  scented  the  possibility  of  a  controversy  with 
one  of  the  European  powers,  but  quieted  any  feeling  of 
apprehension  by  his  own  confidence  in  the  existing 
forms  of  revenue,  and  in  the  efficacy  of  a  purely  " loan 
policy  "  in  case  of  hostilities.  Some  extenuation  of  this 
optimism  is  to  be  found  in  the  fact  that  at  this  time  the 
revenues  were  producing  upwards  of  fourteen  and  a  half 
millions  of  dollars,  while,  according  to  his  estimates, 
future  disbursements  would  not  exceed  one-half  that 
amount,  owing  to  the  temporary  cessation  of  the  appro- 


40  THE  INTERNAL   REVENUE  SYSTEM. 

priation  in  behalf  of  the  sinking-fund.1  One  year  later 
he  reiterated  this  confidence,  and  says :  "  No  internal  or 
direct  taxes  are,  therefore,  contemplated,  even  in  the  case 
of  hostilities  carried  on  against  the  two  great  belligerent 
powers."  2 

Even  after  the  outbreak  of  hostilities,  he  maintained 
implicit  confidence  in  the  public  credit  as  a  basis  of  war 
financiering,  and  there  is  no  evidence  that  he  ever  aban- 
doned this  position.3  In  a  financier  so  astute  as  Galla- 
tin such  an  attitude  can  only  be  explained  on  the 
ground  of  party  expediency,4  although  even  this  hy- 
pothesis is  little  consonant  with  his  usual  independence 
of  thought  and  action.  By  1812,  however,  he  had  so 
far  modified  his  opinions  as  to  acknowledge  the  neces- 
sity of  resort  to  some  sort  of  internal  duties,  and  was 
led  to  advocate,  in  addition  to  an  increase  of  the  customs 
revenue,  a  direct  tax  of  three  million  dollars,  as  well  as 
a  resort  to  the  excise  sufficient  to  produce  two  millions 
more.5  From  this  we  are  not  to  infer  that  the  secretary 
had  abandoned  his  former  attitude.  His  faith  in  the 
loan  policy  still  remained  intact;  the  apparent  change 
of  attitude  being  due  to  the  fact  that  customs  revenues 
had  fallen  below  the  estimates  of  peace  demands,  and 
the  new  duties  were  to  supplement  ordinary  expendi- 
ture, not  to  be  used  as  a  basis  for  the  conduct  of  the 
war.  But  even  these  halting  measures  were  only  adopted 
in  so  far  as  they  related  to   the    customs.6      The   con- 


i  Report  cm  Finances,  vol.  i..  p.  360.  2  Ibid.,  p.  .".77. 

3  "  Public  Debts,"  H.  C.  Adams,  p.  114. 

4  Scbouler,  "History  of  tbe  United  States,"'  vol.  ii.,  p.  344. 

5  State  Papers,  vol.  viii.,  p.  525. 

6  Act  of  July  1,  1812. 


EMERGENCY  SYSTEM   OF   THE    WAR    OF  1812.      41 

sideration  of  the  excise  was  deferred  by  Congress  until 
a  later  session. 

By  the  summer  of  1813,  the  collapse  of  the  loan  pol- 
icy of  the  administration  was  complete;  and  a  special 
session  of  Congress  was  called,  to  which  the  President 
appealed  for  immediate  action  upon  the  finances.  Un- 
der this  spur  from  the  Executive,  Gallatin's  proposals 
were  in  part  adopted,  and  several  new  sources  of  inter- 
nal revenue  were  opened  up.  Only  those  taxes  ap- 
proved by  the  experience  of  former  years  were  selected 
as  the  basis  of  the  new  excise  system,  but  with  this 
commendable  modification,  that  they  took  into  consider- 
ation State  prejudices  ;  while  the  important  limitation 
was  added  that  they  were  to  be  considered  as  "  tempo- 
rary war  taxes,"  to  continue  in  force  but  one  year  after 
the  close  of  hostilities,  and  to  be  pledged  to  the  payment 
of  the  interest  on  the  public  debt. 

Seven  distinct  taxes  were  imposed  during  this  ses- 
sion of  Congress,  estimated  to  produce  upwards  of  five 
millions  of  dollars.  These  were,  first,  a  direct  tax  of 
three  million  dollars  to  be  first  assessed  in  1814 ; *  sec- 
ond, a  duty  upon  carriages  for  the  conveyance  of  per- 
sons, to  be  assessed  at  rates  varying  from  two  to  twenty 
dollars,  according  to  the  description  of  the  vehicle ; 2 
third,  a  uniform  duty  of  four  cents  per  pound  on  all 
sugar  refined  in  the  United  States;3  fourth,  a  license 
tax  upon  distillers  of  spirituous  liquors,  to  be  assr 
according  to  the  capacity  of  the  still,  the  duration  of  its 
operation,  and  the  material  used  in  production.4  In  ad- 
dition thereto,  stamp  duties  were  to  be  levied  upon  all 

i  Acts  of  July  22  ami  An-.:'.  1813.    "  Art  of  An-.  2.  1813. 

2  Act  of  July  24,  1813.  '   Lets  of  July  24  and  A.ug.2,1813. 


42  THE  INTERNAL    REVENUE  SYSTEM. 

legal  instruments,  bank-notes,  bonds,  and  all  evidences 
of  obligations  ; 1  a  millage  tax  upon  sales  at  auction,2 
as  well  as  a  further  license  tax  upon  retailers  of  wines 
and  spirituous  liquors.3 

Several  modifications  in  the  method  of  assessing  the 
tax  on  distilled  spirits  were  introduced,  due  probably  to 
the  suggestions  of  Gallatin,  who,  while  acknowledging 
that  there  was  "no  more  eligible  object  of  taxation  than 
ardent  spirits,"  had  strenuously  objected  to  the  earlier 
measures,  because  they  bore  unequally  upon  the  differ- 
ent classes  of  producers.4  Accordingly  the  rates  upon 
spirits  distilled  from  foreign  materials  exceeded  those 
upon  the  domestic  product ;  while  the  small  manufac- 
turer was  further  protected  by  an  option  to  pay  on  the 
amount  produced,  or  to  take  out  a  license  for  a  limited 
period,  and  pay  upon  the  capacity  of  the  still.5 

The  difference  in  rates  upon  spirits  distilled  from 
domestic  and  foreign  products  was  due  to  the  alleged 
perniciousness  of  rum  as  a  beverage,  and  the  desire  to 
encourage  the  domestic  industry.  In  the  method  of 
collection  of  the  direct  tax,  decided  improvements  were 
also  inaugurated.     As  we  have  seen,  the  objects  taxable 

i  Act  of  Aug.  2, 1813.  3  Act  of  Aug.  2,  1813. 

2  Act  of  July  24,  1813.  4  State  Papers,  vol.  viii.,  p.  525. 

5  The  schedule  of  assessments  was  as  follows  :  — 

BATE  ON  DOMESTIC  BATE  ON  SrlBITS 

SPIRITS  PEB  CAPACITY  OF  FBOM  FOBEIGN  ARTICLES  PEE 
PEBIOD.                                  STILT.  FOB  DIFFEEENT  CAPACITY  OF   STI1.L  FOR 

PERIODS  OF  DIFFEBENT  PEEIOD8 

OPERATION.  OF  OPERATION. 

2  weeks         9  cents 

1  month       18  cents 25  cents 

2  months 32  cents 

3  months 42  cents 60  cents 


EMERGENCY  SYSTEM  OF  THE   WAR   OF  1812.      4o 

under  the  earlier  measure  were  land,  houses,  and  slaves, 
the  collections  being  made  under  the  supervision  of 
federal  officials.  The  same  objects  were  designated 
under  this  measure,  and  the  sums  chargeable  to  each 
State  and  county  were  apportioned  upon  the  basis  of 
the  census  of  1810;  but  a  new  provision  was  intro- 
duced, permitting  the  States  to  assume  their  quotas,  and 
collect  them  as  they  might  see  fit,  and  also  to  reap- 
portion the  sums  assigned  the  counties,  where  the  fed- 
eral apportionment  was  deemed  inequitable.  If  assumed 
by  the  States  and  paid  into  the  Treasury  within  a  cer- 
tain time,  a  discount  was  allowed  ;  if  not,  the  excise 
officials  were  directed  to  proceed  with  the  collection  of 
the  tax  according  to  law. 

Every  precaution  was  thus  taken  to  allay  the  opposi- 
tion which  the  tax  was  expected  to  arouse ;  but  just 
as  happened  during  the  later  period  of  the  Civil  War, 
the  fears  of  Congress  were  ill  founded.  The  patriotism 
of  the  people  was  underestimated;  for  the  burdens  of 
the  tax  were  accepted  with  but  little  complaint,  and 
paid  even  with  enthusiasm.  No  assessments  were  made 
under  the  law  until  the  following  year  (1814),  when  the 
resignation  of  Gallatin  threw  its  administration  into 
the  hands  of  Secretary  Campbell,  who  soon  relinquished 
the  portfolio  of  the  Treasury  to  Andrew  J.  Dallas  of 
Pennsylvania,  an  eminent  financier,  but  unpopular  with 
the  House  of  Representatives. 

The  new  secretary  found  the  finances  in  a  most  dis- 
couraging condition.  The  Treasury,  as  he  himself  says, 
"  Was  suffering  from  every  kind  of  embarrassment." 
The  recent  suspension  of  specie  payments  by  the  New 
York    and    Baltimore   banks,   which   had   been    largely 


44.  THE  INTERNAL   REVENUE   SYSTEM. 

instrumental  in  the  sale  of  the  public  securities,  had 
vitiated  credit,  and  dissipated  public  confidence.  The 
bonds  had  fallen  to  eighty  and  finally  to  sixty  cents 
on  the  dollar,  while  the  diminishing  revenues  were 
further  depleted  by  payments  in  depreciated  bank-notes 
and  treasury  certificates.  The  estimates  for  the  fiscal 
year  1814  showed  a  probable  deficit  of  $31,000,000, 
and  long  before  its  close  it  became  apparent  that 
even  with  the  revenue  measures  extorted  from  the  last 
Congress  it  would  be  impossible  to  conduct  the  war 
longer  on  a  credit  basis.  But  Dallas  grappled  with  the 
situation  with  characteristic  energy,  and  recommended 
the  immediate  revival  of  the  National  Bank,  which  was 
an  indispensable  agent  in  marketing  securities;  and  at 
his  instance  measures  were  at  once  introduced  into 
Congress  for  the  increase  of  the  revenues  by  taxation.1 
His  proposals,  however,  met  with  determined  opposition 
from  two  sources.  The  Committee  of  Ways  and  Means 
was  composed  largely  of  slaveholders,  who  desired  to 
cut  off  the  tax  upon  that  species  of  property;  while 
the  manufacturers  of  New  England  murmured  loudty 
against  any  increase  of  the  taxes  upon  their  industries, 
which  they  maintained  were  in  such  a  formative  state 
as  to  be  unable  to  bear  additional  burdens.2  Jefferson, 
though  retired  from  active  participation  in  politics,  still 
exercised  a  strong  influence  in  the  councils  of  his  party, 
and  with  persistent  determination  endeavored  to  defeat 
these  measures  by  substituting  therefor   a  loan-policy 

1  See  State  Papers,  vol.  viii..  p.  854,  where  Committee  of  Ways 
and  Means,  a  few  days  subsequent  to  the  confirmation  of  Dallas, 
makes  an  elaborate  report  on  the  subject  of  taxation. 

-  Hihlreth,  voL  vi.,  p.  54:3. 


EMERGENCY  SYSTEM   OF  THE    WAR    OF  1812.      45 

of  his  own.1  The  inherent  defects  of  his  proposal,  how- 
ever, prevented  its  ever  coming  up  for  consideration.2 

In  January  of  the  following  year  (1815),  Dallas  made 
a  second  report,  although  the  one  of  the  preceding 
October  was  still  under  consideration  by  the  "Souse. 
In  this  he  advocated  an  increase  of  the  tax  upon  all 
kinds  of  legal  instruments,  the  imposition  of  new  duties 
upon  the  dividends  of  insurance  companies  and  other 
corporations,  as  well  as  a  tax  of  one  dollar  per  barrel 
upon  flour.  It  is  also  a  matter  of  interest  to  note 
the  first  proposition  for  an  income  and  inheritance  tax. 

The  report  came  at  the  darkest  hour  of  the  war. 
The  political  outlook  was  quite  as  gloomy  as  the  fiscal 
one.  Disaster  after  disaster  had  been  met  by  the  army, 
while  a  British  fleet  had  penetrated  even  to  the  federal 
capital.  And  thus,  defeated  and  disgraced  everywhere, 
Congress  was  called  upon  to  impose  increased  burdens 
upon  a  divided  people,  who  had  been  led  by  their  own 
teachings  to  look  upon  a  tax-gatherer  as  a  thief,  if 
not  as  a  burglar.  During  the  closing  days  of  1814  new 
duties  had  been  laid  upon  pleasure  carriages;3  while 
upon  distillers  of  spirituous  liquors  the  minimum  tax 
had  been  increased  to  twenty  cents  per  gallon,  with 
the  option  added  that  a  distiller  could  pay  according 

1  Jefferson  to  Madison.     "Works,"  vol.  vi.,  p.  391. 

2  His  hostility  was  very  bitter;  and  in  his  correspondence  we  find 
him  expressing  himself  as  follows:  "If  anything  could  revolt  our 
citizens  against  the  war,  it  would  he  the  extravagance  with  which 
they  are  about  to  he  taxed.  .  .  .  The  taxes  cannot  be  paid.  How 
can  a  people  who  cannot  get  fifty  cents  a  bushel  for  their  wheat 
pay  five  times  the  amount  of  taxes  they  ever  paid  before?  Yet 
that  will  be  the  case  in  all  the  States  south  of  the  rotomac."  —  Jef- 
ferson  to  Short,  Nov.  28,  1811,  "  Works,"  vol.  vi.,  p.  398. 

3  Act  of  Dec.  15,  1811. 


46  THE  INTERNAL    -REVENUE  SYSTEM. 

to  the  capacity  of  the  still,  or  the  amount  of  spirits 
actually  produced.  Licenses  were  likewise  increased 
fifty  per  cent,  as  Avere  the  postal  and  many  stamp 
charges ;  while  the  duty  on  sales  at  auction  had  been 
raised  one  hundred  per  cent.1  In  addition,  new  taxes 
were  laid  in  response  to  the  secretary's  report,  and  the 
general  charge  of  the  public  debt  applied  to  tliem,  upon 
pig  iron,  iron  castings,  bar  and  rolled  iron,  nails,  and 
candles  at  specific  rates,  while  the  manufactures  from 
paper  and  leather,  as  well  as  playing-cards,  vellum, 
hats,  umbrellas,  saddles,  bridles,  boots,  shoes,  beer,  ale, 
tobacco,  cigars,  and  snuff  were  rendered  dutiable  at  ad 
valorem  rates.  Upon  household  furniture  and  person- 
alty above  $200  a  progressive  tax  ranging  from  $1.00 
on  the  value  of  $400  to  $100  on  the  value  of  $9,000 
was  laid,  while  watches  were  taxed  under  a  separate 
category.2  The  direct  tax  was  also  increased  to  six 
millions  annually,  with  the  privilege  of  State  assump- 
tion attached,  as  provided  in  Acts  of  earlier  date.3 

But  these  measures  were  destined  to  be  of  little  ser- 
vice to  the  Treasury;  for  scarcely  had  they  received 
the  President's  signature,  when  peace  was  declared. 
Almost  immediately  a  marked  revival  in  the  customs 
revenue  was  manifested,4  while  industry,  confined  for 


i  Act  of  Dec.  23,  1814.  2  Act  of  Jan.  18,  1815. 

3  Act  of  Jan.  9, 1815.  This  privilege  of  assumption  was  taken  ad- 
vantage of  by  New  York,  Pennsylvania,  Virginia,  South  Carolina, 
Georgia,  Kentucky,  and  Ohio  in  the  levy  of  1813,  and  by  New  York, 
South  Carolina,  Georgia,  and  Ohio  in  the  levy  of  the  later  date.  In 
the  other  States,  federal  officers  completed  the  assessment,  and  made 
the  collections  from  the  individual  taxpayers. 

4  The  receipts  from  the  customs  in  1816  amounted  to  the  unprece- 
dented sum  of  $36,306,874. 


EMERGENCY  SYSTEM   OF  THE    WAR    OF  1812.      47 

over  a  decade  to  domestic  expansion,  began  [to  recover 
itself. 

As  legatee  of  the  war,  the  Democratic  party  now 
found  itself  burdened  with  an  indebtedness  of  one  hun- 
dred and  twenty-seven  millions  ;  and  Secretary  Dallas, 
roughly  schooled  by  experience,  and  appreciating  more 
thoroughly  than  Congress  the  untrustworthiness  of  the 
customs  revenue,  favored  the  retention  of  a  portion 
of  the  excise  system  sufficient  to  produce  seven  millions 
of  dollars  as  a  basis  for  any  emergency  which  might 
arise  in  future.1  To  this  opinion  Congress  deferred  ■ 
by  refraining  from  any  immediate  action  upon  the  sub- 
ject. The  people  paid  the  taxes  without  complaint,  the 
reorganization  and  payment  of  the  public  debt  being 
a  matter  of  the  first  importance.  For  two  years  after 
the  close  of  the  war  the  internal  duties  were  permitted 
to  remain  upon  the  statute  books,  when  Congress, 
moved  by  a  message  from  the  President,  finally  deter- 
mined that  no  more  internal  taxes  should  be  collected, 
save  those  in  arrears,  after  the  year  1817.2 

The  immediate  result  of  this  over-confident  action 
was  a  deficit  in  the  budget,  amounting  in  1819  to  three 
million  dollars,  which  had  to  be  met  by  a  temporary 
loan.3  The  deceptive  increase  in  receipts  from  the 
customs  was  but  temporary,  and  due  to  the  abundance 
of  English  goods,  so  long  deprived  of  their  most  lucra- 
tive market,  which  sought  oui  shores.  In  fact,  had  it 
not  been  for  the  arrearages  of  the  direct  and  excise 
taxes,  which  continued  to  form  a  budgetary  item  as  late 
as  1848,   the   deficiency  would  have  been  a  recurring 

i  State  Papers,  vol.  ix.,  p.  1G.         3  Act  of  May  15,  1820. 
2  Act  of  Dec.  23,  1817. 


48  THE  INTERNAL   REVENUE  SYSTEM. 

one,  as  the  customs  receipts  seldom  sufficed  for  the  cur- 
rent needs  of  the  Treasury.1  From  this  time  on,  down 
to  the  outbreak  of  the  Civil  War,  no  recourse  was  had 
to  internal  taxes  of  any  kind,  though  the  Treasury  suf- 
fered alternately  from  excessive  or  deficient  revenues. 

The  distressing  embarrassments  experienced  from  too 
exclusive  dependence  upon  revenues  from  sources  ex- 
ternal to  the  country,  and  the  absence  of  machinery 
by  which  the  internal  resources  of  the  nation  might 
be  immediately  realized  on,  has  taught  the  lesson,  to  be 
even  more  strongly  impressed  by  the  experiences  of  the 
Civil  War,  that  a  sound  financial  policy  always  provides 
in  time  of  peace  for  the  possibility  of  war ;  and  the  ex- 
perience of  the  United  States  proves  conclusively  that 
customs  revenues  are  so  irregular  that  the  means  for 
immediately  realizing  upon  the  proceeds  of  current  in- 
dustry should  never  be  permitted  to  get  out  of  run- 
ning order.  The  absence  of  such  a  system  of  internal 
taxation  at  the  outbreak  of  the  War  of  1812  was  a  mat- 
ter of  regret  to  Secretary  Dallas,  and  certainly  offers 
a  lesson  in  practical  policy ;  for,  had  such  a  sjstem 
existed,  the  early  movements  of  the  Avar  would  have 
been  greatly  invigorated,  the  public  credit  might  have 
been  preserved  unimpaired,  while  the  pecuniary  contri- 
butions of  the  people  would  have  been  rendered  more 
effective.2  Moreover,  when  Congress  did  take  the  mat- 
ter of  inland  taxation  in  hand,  it  did  it  so  ungraciously 


1  The  receipts  from  the  sales  of  public  lands  also  formed  a  consid- 
erable item  in  the  annual  budget ;  the  revenue  from  this  source  alone 
in  1836  amounting  to  fourteen  millions,  while  during  the  following 
year  the  receipts  rose  to  twenty-four  millions. 

2  Cf.  Report  on  Finances,  State  Papers,  vol.  ix.,  p.  2. 


EMERGENCY  SYSTEM  OF  TUE    WAR   OF  1812.      49 

as  to  inspire  little  confidence  and  to  offer  but  little 
relief.  Unwise  taxes  were  levied,  and  false  estimates 
made.  For  instance,  the  secretary  estimated  a  return 
of  $3,500,000  from  manufactures,  while,  as  a  matter  of 
fact,  the  receipts  were  only  about  one-sixth  of  that  sum. 
From  household  goods  two  million  dollars  were  expected, 
instead  of  fifty-one  thousand  actually  turned  into  the 
Treasury.  In  all  branches  of  the  revenue  the  same  dis- 
crepancies might  be  shown  ;  and  especially  true  was  this 
during  the  first  two  years  of  the  system,  when  assis- 
tance was  most  needed.  Throughout  its  existence  the 
administration  was  sadly  imperfect ;  and  but  a  portion 
of  the  taxes  assessed  were  collected,  as  will  be  seen  by 
the  following  table  :  — 

Taxes  Accrued  and  Collected,  with  Cost  of    Collecting  the  Same 
for  the  Fiscal  Years  — 


ACCRUED 

AMOUNT 

cost  or 

PERCENTAGE 

TAXES. 

COLLECTED. 

COLLECTION. 

COST. 

1814 

$3,262,1'.  )7 

$1,910,995 

$148,991 

7.8  per  cent. 

1815 

0,242,503 

4,976,529 

279,277 

5.6  per  cent. 

1816 

4,633,799 

5,281,121 

253,440 

4.8  per  cent. 

1817 

3,002,000 

3,000,000 

180,000 

6     per  cent. 

50  THE   INTERNAL    REVENUE  SYSTEM. 


CHAPTER  III. 
THE    PERIOD    OF    THE    CIVIL   WAR.     (1861-1870.) 

During  the  forty-six  years  which  intervene  between 
the  events  recorded  in  the  last  chapter  and  the  outbreak 
of  the  Civil  War,  no  recourse  to  internal  taxation  seems 
to  have  been  contemplated  by  either  of  the  great  polit- 
ical parties;  and,  saving  an  occasional  difference  of 
opinion  over  the  United  States  Bank  and  questions  of 
internal  improvements,  the  Democratic  party  was  able 
to  cling  consistently  to  the  heritage  of  *political  ideals 
upon  which  it  had  come  into  power  at  the  opening  of 
the  century. 

Persistent  constitutional  jealousies  of  the  federal 
power  defeated  every  measure  for  the  betterment  of 
the  fiscal  service.  The  second  Bank  of  the  United 
States  fell  before  this  hostility  in  1836,  and  was  treated 
as  summarily  as  the  excise  had  been  twenty  years  ear- 
lier. Plans  of  expenditure  for  internal  improvements 
were  disposed  of  in  a  similar  manner,  while  a  vacil- 
lating tariff  policy  stimulated  industrial  activity  one 
year,  only  to  destroy  it  in  the  next.  The  policies  of  the 
various  incumbents  of  the  Treasury  Department  during 
this  period  differ  only  in  detail.  Economy  of  adminis- 
tration was  the  aim  of  the  party  in  power ;  and  the 
restriction  of  governmental  functions  to  the  narrowest 
possible  scope,  the  guiding  principle  of  treasury  manage- 
ment. 


THE  PERIOD   OF  THE  CIVIL    WAR.  51 

The  era  upon  which  we  are  now  about  to  enter  marks 
a  clearly  defined  breaking  away  from  such  policies. 
For  the  first  time  in  its  history,  American  political 
thought  shook  itself  free  from  the  strict  constructionist 
teachings  which  had  animated  all  economic  legislation 
for  over  two  generations;  for,  just  as  the  War  of  1812 
marks  a  more  or  less  complete  breaking  away  from  an 
outgrown  colonial  policy,  so  the  new  order,  inaugurated 
by  a  domestic  struggle,  developed  financial  and  indus- 
trial conditions  only  commensurate  with  the  new  era  of 
national  life  into  which  the  country  was  irresistibly  tend- 
ing. The  Civil  War  was  a  formative  period.  It  was  an 
era  of  fiscal  reorganization,  in  which  old  political  ideas 
and  the  last  vestiges  of  colonialism  were  being  sloughed 
off,  never  to  be  Resumed  again.  The  nation  had  achieved 
its  majority,  and  the  forces  which  had  been  gathering 
strength  since  the  time  of  Jackson  crystallized  into  per- 
manent form. 

At  the  outbreak  of  the  Civil  War  the  finances  were 
in  confusion.  Under  Cobb,  the  retiring  secretary,  things 
had  been  going  from  bad  to  worse.  The  tariff  receipts 
had  declined,  and  finally  sank  so  low,  during  the  period 
from  1857  to  1860,  as  to  require  supplemental  loans  to 
satisfy  the  needs  of  the  Treasury.  Public  confidence 
had  been  dissipated  in  a  like  manner  by  the  loose  fiscal 
methods  known  to  prevail,  while  industry  suffered  under 
all  the  evils  incident  to  an  unregulated  bank  currency. 
Through  extravagance,  incorrect  estimates,  and  the  re- 
duction of  the  tariff  charges,  the  public  debt  had  been 
increased  to  sixty-five  millions,  which  only  with  some 
difficulty  had  been  placed  upon  the  market.  Secretary 
Cobb,  in  his  last  annual  report,1  had  forecast  the  impend- 
1  Report  on  Finances,  1860,  p.  7. 


52  THE  INTERNAL  REVENUE  SYSTEM. 

ing  danger,  and  sounded  a  note  of  warning  of  the  ap- 
proaching political  crisis,  which  was  to  convulse  the 
country  for  the  next  four  years ;  but  nothing  was  done 
to  check  the  tide  of  affairs  until  the  advent  of  the  Re- 
publican administration  under  Lincoln,  when  the  work 
of  reconstruction  immediately  began,  and  from  out  the 
ruins  of  the  fallen  regime  was  erected  a  fiscal  order, 
probably  the  most  extraordinary  the  modern  world  has 
known.  From  the  opening  of  the  extra  session  of  Con- 
gress in  the  summer  of  1861,  down  to  the  close  of  that 
decade,  probably  more  revenue  measures  were  passed 
than  during  the  preceding  seventy  years  of  the  country's 
existence ;  while  the  amount  of  money  extracted  from 
the  pockets  of  the  people  in  the  form  of  loans  and  taxes 
appears  at  this  day  almost  incredible.  From  out  the 
wreckage  of  the  State  banks  was  erected  a  magnificent 
national  banking  system ;  while  the  tax  legislation, 
wholly  experimental  in  form,  was  of  such  vast  propor- 
tions and  so  far  reaching  in  its  consequences,  that  the 
nation  stood  astonished  at  its  resources  and  alarmed  for 
the  consequences  of  its  acts. 

Accustomed  heretofore  to  a  degree  of  prosperity  pre- 
viously unexampled  in  the  history  of  nations,  the  United 
States  had  grown  rich  without  having  experienced  the 
weight  of  national  burdens,  and  likewise  unconscious  of 
its  ability  to  sustain  them.  Providentially,  the  nation's 
power  of  endurance  was  to  be  tested  only  by  degrees  ; 
for  had  the  immensity  of  the  struggle  upon  which  it 
was  entering  been  apparent  at  the  outset,  the  country 
would  probably  have  shrunk  from  it  in  despair. 

To  the  extra  session  of  Congress,  convened  at  the  call 
of  the  President  in  the  summer  of  1861,  Secretary  Chase 


THE  PERIOD   OF  THE  CIVIL    WAR.  53 

submitted  measures  which  he  considered  necessary  and 
competent  to  the  "  speedy  and  effective  suppression  of 
the  gigantic  rebellion."  In  it  he  estimated  the  probable 
annual  needs  of  the  Treasury  at  $318,519,518,  a  sum  to 
be  raised  wholly  by  means  of  loans,  while  taxes  were 
to  be  relied  upon  to  meet  the  annual  interest  charges 
thereon,  as  well  as  to  make  up  the  current  deficiency 
in  the  civil  expenses.  His  financial  policy  was  based 
exclusively  on  loans.  No  attempt  was  to  be  made  to 
meet  any  portion  of  the  extraordinary  war  expenditure 
by  taxation,  a  decision  which,  like  the  projects  of  Gal- 
latin fifty  years  earlier,  seriously  imperilled  the  credit  of 
the  government.  Of  the  revenue,  the  customs,  wholly 
unreliable,  was  to  be  the  chief  stay,  and  was  expected 
to  produce  fifty-seven  millions,  while  a  direct  tax,  to  be 
apportioned  among  the  States  according  to  their  respec- 
tive populations,  was  advocated,  sufficient  to  produce 
twenty  millions  more.1 

In  so  far  as  Mr.  Chase  recommended  that  the  extraor- 
dinary expenditure  be  met  wholly  from  loans,  Congress 
fully  concurred ;  but  in  the  matter  of  taxation  it  pos- 
sessed opinions  of  its  own.  The  plans  advanced  by  the 
secretary  for  the  direct  tax  were  promptly  discarded  as 
unconstitutional,  while  the  new  tariff  measure  followed 
lines  somewhat  different  from  those  laid  down  in  the 
secretary's  report.  The  apportioned  State  tax,  as  finally 
passed,  was  for  twenty  million  dollars,  which  was  to  be 
assessed,  upon  free  and  slave  States  alike ;  while  an  in- 
come tax  of  three  per  cent  on  all  incomes  over  eight 
hundred  dollars  was  attached  to  the  measure.2 

1  Senate  Ex.  and  Misc.  Doc,  No.  2,  First  Session,  Thirty-seventh 
Congress.  2  Act  of  Aug.  5,  1861. 


54  THE  INTERNAL  REVENUE  SYSTEM. 

Even  at  this  time  the  war  was  not  taken  very  seri- 
ously, and  the  magnitude  of  the  struggle  which  was  to 
convulse  the  nation  for  the  next  four  years  was  but 
little  appreciated.  For  this  reason  the  measures  adopted 
were  viewed  as  but  temporary,  and  did  not  contemplate 
a  continued  or  permanent  deficiency  in  the  revenues. 
In  the  closing  days  of  the  year,  however,  affairs  began 
to  assume  a  graver  hue,  and  the  character  of  the  war  to 
be  more  generally  appreciated.  Specie  payments  were 
suspended  by  the  banks  on  Dec.  28, 1861 ;  a  few  months 
after  the  government  began  its  issue  of  demand  notes, 
whose  purchasing  power  steadily  declined  from  the  day 
of  issue,  while  the  prices  of  commodities  as  steadily 
rose. 

When  Congress  reassembled  in  December,  the  secre- 
tary was  forced  to  acknowledge  the  inaccuracy  of  his 
earlier  estimates.  Instead  of  fifty-seven  millions  from 
the  customs,  as  he  had  expected,  he  now  felt  constrained 
to  reduce  his  estimate  to  thirty-two  millions,  while  rev- 
enues from  miscellaneous  sources  manifested  a  like  fall- 
ing off.  Neither  the  direct  nor  the  income  tax  had  as 
yet  become  operative,  and  little  could  be  expected  from 
them  for  some  months  at  least. 

In  view  of  these  showings,  as  well  as  the  fact  that 
the  public  debt  was  piling  up  at  the  rate  of  two  million 
of  dollars  a  day,  it  seemed  to  the  secretary  advisable  to 
increase  the  revenues  to  ninety  millions,  by  a  modifica- 
tion of  the  customs  duties  and  the  direct  tax,  and  the 
inauguration  of  an  excise  system,  modelled  after  that  of 
the  War  of  1812,  and  based  upon  whiskey,  tobacco, 
carriages,  bank-notes,  conveyances,  legacies,  and  the 
like.1  From  these  combined  sources  it  was  felt  that 
1  Report  on  Finances,  1861,  p.  15. 


THE  PERIOD   OF  THE  CIVIL    WAR.  55 

every   possible    demand   of    the   government    could   be 
met. 

A  sound  financial  policy,  as  was  soon  to  be  demon- 
strated, demanded  much  more  than  this  ;  but  Mr.  Chase 
was  still  enamored  with  his  "  loan  policy,"  and  imbued 
with  the  widely  prevalent  belief  in  the  early  termina- 
tion of  the  war;  while  he  feared,  along  with  many 
others,  that  a  vigorous  resort  to  taxation  would  weaken 
the  war  spirit  of  the  people,  burdened  as  they  were  with 
the  other  consequences  of  the  struggle. 

How  greatly  he  underestimated  the  loyalty  and  will- 
ingness of  the  people  to  sustain  him  in  his  efforts,  is 
seen  from  the  tone  of  several  memorials  presented  to 
Congress  by  various  commercial  and  scientific  associa- 
tions, praying  that  more  adequate  measures  be  taken 
for  the  prosecution  of  the  war.  The  New  York  Cham- 
ber of  Commerce  advocated  the  raising  of  $214,000,000 
from  the  excise  by  substantially  the  same  methods  which 
the  English  system  employed ;  while  the  American  Geo- 
graphical and  Statistical  Society  memorialized  Congress 
to  devise  a  system  adequate  to  produce  $268,000,000  from 
inland  sources,  with  customs  duties  sufficient  to  increase 
this  sum  to  ftSlSjOOO^OO.1 

Congress  appreciated  more  clearly  than  did  the  secre- 
tary the  magnitude  of  the  struggle  upon  which  the 
country  was  entering,  and  better  understood  the  temper 
of  the  people.  But  no  data  existed  upon  which  it  might 
base  its  action,  no  reliable  statistics  of  commerce  and 
manufactures  were  available,  and  history  offered  little 
for  guidance  save  the  emergency  systems  of  1794  and 
1814.  The  House,  however,  instructed  the  Committee  of 
Ways  and  Means  to  prepare  a  bill  adequate  to  produce 
1  See  Bankers'  Magazine,  vol.  xvi.,  pp.  913,  705-727. 


56  TEE  INTERNAL   REVENUE  SYSTEM. 

at  least  one  hundred  and  fifty  millions  of  revenue,1  and 
on  the  12th  of  March,  1862,  Mr.  Morrill  of  Vermont  in- 
troduced- a  measure  embodying  the  views  of  the  com- 
mittee, which  was  thought  sufficient  to  yield  this  amount. 

The  extra  session  of  the  preceding  year,  which  was  so 
prolific  of  fiscal  measures,  had  authorized  loans  amount- 
ing to  $610,000,000;  and  these,  if  current  expenditure 
continued  unabated,  would  probably  have  to  be  increased 
to  $950,000,000  before  the  close  of  1862.  The  interest 
charges  alone  on  this  amount  would  reach  from  sixty  to 
seventy  millions ;  and  the'  civil  establishment  would  de- 
mand sixty  millions  more,  while  the  military  force  to  be 
maintained  subsequent  to  the  termination  of  the  war 
would  considerably  increase  this  amount.  Public  inter- 
est, as  well  as  a  sound  financial  policy,  demanded  that 
all  of  these  charges  should  be  met  from  the  proceeds  of 
current  revenue.  Further  than  this,  a  vigorous  applica- 
tion of  the  taxing  power  is  always  essential  to  a  sound 
credit,  especially  if  deficit  financiering  be  long  continued, 
as  it  was  during  this  period.  It  is  unfortunate  that  this 
most  elementary  principle  of  finance  was  not  appreciated 
before  the  Avar  had  been  in  progress  nearly  two  years, 
and  the  credit  of  the  government  had  been  so  seriously 
impaired.  Even  at  this  time  the  Administration  did 
not  contemplate  more  than  the  raising  of  permanent 
expenditures  by  taxation  ;  all  other  expenditures  were 
to  be  met  by  the  further  issuance  of  loans. 

In   Congress  the  discussion  upon  the  report  of  the 

committee   wore   on  for   three   months.      Amendments 

were  offered  to  almost  every  section  of  the  bill,  while 

several    entirely   new   measures    were    introduced.     As 

i  By  Joint  Resolution,  Jan.  21, 1862. 


THE  PERIOD   OF  THE  CIVIL    WAR.  57 

finally  engrossed,  it  provided  in  general  for  the  following 
taxes  :  upon  beer,  ale,  porter,  and  other  malt  liquors,  one 
dollar  per  barrel ;  distilled  spirits,  of  first  proof,  twenty 
cents  per  gallon ;  upon  private  persons  or  corporations 
carrying  on  trade,  a  special  license  tax  varying  according 
to  the  nature  and  amount  of  the  business  done ;  while 
upon  all  manufactures,  articles,  and  products,  specific  or 
ad  valorem  duties  were  levied,  the  general  level  of  the 
latter  being  three  per  cent.  Upon  auction  sales  one- 
tenth  of  one  per  cent  was  imposed.  Carriages,  yachts, 
billiard  tables,  and  plate  were  taxed  according  to  descrip- 
tion, as  in  many  of  the  State  systems.  Corporations  were 
taxed  according  to  various  methods,  the  gross  receipts 
tax  being  applied  to  railroads  and  transportation  com- 
panies, while  banks,  trust,  savings,  and  insurance  com- 
panies paid  upon  dividends  declared.  Despite  the 
opposition  to  the  income  tax,  it  was  retained  and  made 
slightly  progressive  in  principle,  while  the  exemption 
allowed  was  reduced  to  six  hundred  dollars.  Upon 
receipts  from  advertising,  the  same  rate  as  upon  rail- 
roads (three  per  cent)  was  imposed  ;  while  stamps  vary- 
ing in  amount  from  two  cents  to  twenty  dollars  were 
affixed  to  every  transaction  and  to  every  bill  of  ex- 
change. Legacies  and  distributive  shares  of  property 
were  also  taxed  according  to  degree  of  consanguinity.1 
As  will  be  seen,  the  measure  was  very  diffuse.  Few 
taxable  articles  or  forms  of  wealth  were  permitted  to 
escape.     The  committee  had  aimed,  as  Mr.  Morrill  said, 

1  Act  of  July  1,  1862.  The  complete  text  of  the  measure,  -which 
fills  fifty-seven  pages  of  the  Statutes  at  Large,  may  ho  found  in  vol. 
xii.  of  those  publications,  p.  432  et  seq.  The  rates  of  taxes  are  to  he 
found  more  fully  explained  in  subsequent  chapters. 


58  THE  INTERNAL   REVENUE  SYSTEM. 

to  "avoid  all  extremes,"  and  to  "propose  duties  upon 
a  large  number  of  objects  rather  than  confine  them  to 
a  few,  and  thereby  be  forced  to  make  them  excessive 
in  amount,  and  for  that  reason  entirely  unreliable." 1 

Concurrently  with  the  debates  upon  this  measure 
went  a  discussion  of  the  tariff.  Compensatory  customs 
duties  were  obviously  demanded  to  equalize  the  internal 
taxes,  as  well  as  to  conciliate  the  manufacturing  inter- 
ests. The  celebrated  tariff  measure  of  1862  was  there- 
fore passed,  in  presenting  which  to  the  House  Mr. 
Morrill  remarked :  "  It  will  be  indispensable  for  us  to 
revise  the  tariff  on  foreign  imports,  so  far  as  it  may  be 
seriously  disturbed  by  any  internal  duties,  and  to  make 
proper  reparation.  ...  If  we  bleed  the  manufacturer, 
we  must  see  to  it  that  the  proper  tonic  is  administered 
at  the  same  time."  2 

Created  as  these  measures  were,  with  but  few  prece- 
dents for  guidance,  with  conflicting  State  interests  to 
avoid,  and  with  a  people  unfamiliar  with  federal  taxa- 
tion to  conciliate,  • —  a  people  taught  to  look  upon  the 
tax-gatherer,  especially  if  he  bore  the  credentials  of  the 
United  States,  as  quite  as  invidious  as  the  publican  of 
old,  —  the  fiscal  legislation  of  this  session  was  in  a 
large  measure  successful,  and  not  unworthy  of  admira- 
tion. Many  grave  errors  were  soon  discovered  to  have 
crept  into  the  measure,  owing  to  the  haste  in  engross- 
ing it  and  the  novelty  of  its  provisions ;  while  countless 
complications  confused  its  administration,  owing  to  the 
difficulty  of  properly  interpreting  its  meaning.  The 
more  serious  of  the  former  were  removed  by  corrective 
enactments,  while  the  generous  discretionary  power 
i  Congressional  Globe,  1861-1862,  p.  1194.  2  Ibid.,  1196. 


THE  PERIOD   OF  TUE  CIVIL    WAR.  59 

granted  the  Commissioner  of  Internal  Revenue  enabled 
him  to  supplement  and  relieve  the  latter  by  his  own 
rulings. 

Up  to  the  passage  of  this  Act,  the  policy  of  the  Ad- 
ministration had  been  in  a  sense  apologetic  and  concili- 
atory; and  it  was  feared  that  such  a  drastic  measure 
would  arouse  opposition  to  the  continuance  of  the  war. 
No  such  result  followed,  however ;  in  fact,  the  govern- 
ment was  apparently  strengthened  by  it,  while  public 
securities  immediately  became  stronger.  Trade  was  by 
this  time  recovering  from  the  early  effects  of  the  war, 
and  was  rapidly  expanding  under  the  stimulus  of  an 
inflated  circulation  and  the  unusual  government  de- 
mand. Prices  were  also  rising,  the  market  was  enlar- 
ging, and  the  demand  for  labor  was  constant,  so  that 
under  these  conditions  the  support  of  the  war  became 
a  cheerful  duty  to  the  majority  of  citizens. 

Contrary  to  all  expectations,  the  measure  did  not 
immediately  affect  the  Treasury  receipts.  For  the  ten 
months  of  the  fiscal  year  1863,  the  returns  from  all 
internal  sources  were  but  $37,640,787,  instead  of  over 
$100,000,000,  as  had  been  expected.  This  discrepancy 
between  estimated  and  actual  receipts  the  secretary  en- 
deavored to  explain  by  the  newness  of  the  law  and  the 
imperfections  of  its  administration ;  "  but  such  care," 
he  said,  "had  been  taken  to  obtain  correct  premises, 
that  it  was  hardly  thought  possible  that  the  conclusions 
deduced  from  them  could  be  wide  of  the  truth." 1  Mr. 
Morrill  had  estimated  the  revenue  for  the  first  year  of 
the  operation  of  the  act  at  $101,925,000 ; 2  but  Secre- 

1  Report  on  Finances,  1863,  p.  3. 

2  Congressional  Globe,  18G1-18G2,  p.  1194. 


60  THE  INTERNAL  REVENUE  SYSTEM. 

tary  Chase,  believing  this  an  overestimate,  had  secured 
a  competent  statistician,  who  devoted  himself  for  some 
time  to  "ascertaining,  with  the  aid  of  practical  men, 
conversant  with  business,  the  probable  amount  of  rev- 
enue from  each  object  of  taxation,"  and,  as  a  result  of 
these  calculations,  he  thought  it  safe  to  anticipate  at 
least  $85,456,303  from  the  excise,1  a  sum,  as  we  have 
seen,  more  than  twice  the  amount  actually  turned  into 
the  Treasury.  This  great  divergence  between  actual  and 
estimated  receipts,  the  secretary  thought,  was  due  to  the 
"  imperfect  execution  "  of  the  law,  to  the  changes  made 
in  it  by  Congress,  and  to  the  nature  of  the  system 
itself. 

By  this  time  the  war  had  been  in  progress  nearly  two 
years  and  a  half,  the  public  debt  had  reached  the  ex- 
traordinary amount  of  $1,098,793,000,  and  the  public 
viewed  with  some  apprehension  any  further  resort  to 
credit.  But  from  this  time  on  a  turning  in  the  tide  is 
noticeable,  and  the  receipts  from  the  excise  steadily  in- 
crease in  importance.  Thus,  while  the  receipts  from 
this  source  for  the  quarter  ending  Sept.  30,  1863,  were 
but  seventeen  and  one-half  millions,  in  the  succeeding 
quarter  they  rose  to  over  twenty-seven  millions,  while, 
for  the  closing  three  months  of  the  fiscal  year  1861, 
over  thirty-seven  million  dollars  were  returned  from 
this  source. 

The  full  magnitude  of  the  struggle  had  also  become 
apparent,  and  the  loyalty  and  spontaneity  with  which 
the  nation  had  accepted  earlier  legislation  imposing 
taxation  led  the  Administration  to  contemplate  even 
greater  dependence  upon  this  source  in  the  future. 
1  Report  on  Finances,  1863.  p.  3. 


THE  PERIOD   OF  THE  CIVIL    WAR.  61 

The  pure  "  loan  policy "  had  failed  beyond  cavil,  and 
must  be  abandoned.  Sound  financiering,  as  well  as 
the  public  prejudice  against  an  inordinate  indebtedness, 
clearly  demanded  a  more  vigorous  utilization  of  the 
taxing  power.  This  fact  is  recognized  by  Mr.  Chase  in 
his  December  report,  in  which  document  he  boldly  ad- 
vances plans  for  the  increase  of  the  tax  levy  to  one 
hundred  and  fifty  million  dollars  from  the  excise  alone.1 
In  this  report  the  secretary  at  lasts  deserts  his  previous 
timid  policy,  and  advocates  plans  somewhat  commen- 
surate with  the  serious  nature  of  the  occasion. 

This  portion  of  the  policy  of  Mr.  Chase  has  been  the 
subject  of  much  discussion.  By  many  it  has  been  con- 
tended that,  had  he  manifested  the  same  courage  and 
independence  in  the  earlier  stages  of  the  war  that  char- 
acterized his  later  recommendations,  not  only  would  the 
Treasury  have  been  saved  millions  of  dollars,  but  the 
moral  effect  of  an  adequate  revenue  upon  the  South 
and  foreign  nations  might  have  operated  to  bring  the 
war  to  a  more  speedy  termination.  Doubtless  a  more 
vigorous  application  of  the  taxing  power  would  have 
had  these  effects;  doubtless,  also,  the  credit  of  the 
country  would  have  been  better  sustained  had  taxation 
been  more  resolutely  applied;  but,  to  be  sure  that  this 
would  not  have  been  a  penny  wise  and  pound  foolish 
policy,  it  is  necessary  to  estimate  the  effect  of  such  a 
policy  upon  the  industrial  conditions  of  the  country. 
As  a  matter  of  fact,  all  testimony  seems  to  indicate 
that  trade  and  industry  during  the  first  eighteen  months 
of  the  war  were  most  unsettled  and  abnormal.  Capital 
was  in  a  state  of  flux.  Labor  was  seeking  new  fields, 
i  Report  on  Finances,  18G3,  p.  12. 


62  THE  INTERNAL   REVENUE  SYSTEM. 

while  new  industries  were  everywhere  making  their 
appearance,  eventually  completely  to  alter  the  appear- 
ance of  the  country.  Successful  financial  management 
in  time  of  stress  demands  that  the  first  solicitude  of  a 
minister  be  the  material  well-being  of  the  people.  "  A 
poor  nation,  a  poor  treasury,"  should  be  the  guiding 
axiom  of  all  Treasury  management.  In  the  early  days 
industry  would  hardly  have  borne  the  burdens  which  it 
later  accepted  with  comparative  ease.  It  would  have 
been  embarrassed,  possibly  seriously  crippled,  by  the 
sudden  changes  in  the  conditions  of  trade  and  produc- 
tion which  such  a  weight  of  taxation  entailed. 

But  aside  from  the  inability  of  the  country  to  sustain 
such  a  drain,  was  it  possible  to  have  rendered  the  ser- 
vice more  efficient  and  thus  more  immediately  produc- 
tive ?  As  we  have  seen,  the  receipts  for  1863  were  but 
slightly  in  excess  of  thirty-seven  million  dollars  from 
sources  which  the  most  conservative  had  believed  capable 
of  producing  eighty -five  millions.  In  1864  these  same 
sources  yielded  one  hundred  and  nine  millions ;  while  in 
the  succeeding  year  two  hundred  and  nine  millions  were 
covered  into  the  Treasury,  mainly  from  the  same  sources 
and  at  the  same  rates  as  obtained  in  the  years  preced- 
ing, for  the  Act  of  1864  but  slightly  affected  receipts  in 
this  latter  year.  These  facts  clearly  indicate  that  the 
fault  lay  not  so  much  with  the  inadequacy  of  the  meas- 
ure as  in  the  faulty  administration  of  the  system.  In- 
creasing, as  the  receipts  do,  at  a  nearly  geometric  ratio 
for  these  three  years,  it  is  by  no  means  certain  that  the 
law  of  1862  would  not  have  proved  as  productive  in  the 
long  run  as  the  later  enactment;  for,  as  the  Revenue 
Commission  of  1865  stated,  the  extravagant  rates  of  the 


THE  rEEIOD   OF  THE  CIVIL    WAR.  63 

laws  of  1864  and  1865  were  in  large  part  neutralized  by 
the  losses  arising  from  evasion  and  fraudulent  returns. 
Experience  seems  to  teach  that  time,  and  time  alone,  is 
essential  to  perfect  and  render  productive  an  intricate 
system  of  excise. 

In  view,  therefore,  of  the  unsettled  condition  of  indus- 
try, as  well  as  the  imperfect  development  of  the  fiscal 
machinery,  is  it  not  unjust  to  lay  at  the  door  of  the 
Treasury  Department  the  responsibility  for  the  tardy 
productivity  of  the  excise  ?  At  the  outside,  receipts 
could  hardly  have  been  advanced  more  than  nine  months, 
even  had  Congress  taken  the  subject  of  taxation  reso- 
lutely in  hand  during  the  special  session  of  1861 ;  and 
few  will  maintain  that  it  was  at  that  time  in  a  posi- 
tion adequately  to  grapple  with  the  problem.  It  would 
seem  that  the  most  that  could  have  been  done  by  the 
earlier  sessions  of  Congress  lay  in  the  line  of  prepara- 
tion, and  possibly  in  the  affixing  of  certain  taxes  to  the 
schedule  which  would  have  fallen  on  realized  wealth  and 
been  more  immediately  productive.  And  this  the  secre- 
tary should  have  provided  for. 

By  1863,  however,  things  had  changed  greatly.  Com- 
merce and  industry  had  become  accommodated  to  the 
changed  conditions  of  production,  and  Congress  was 
equipped  with  data  which  enabled  it  to  proceed  less  ten- 
tatively and  with  more  assurance  of  success.  Early  in 
1864  the  rates  upon  certain  classes  of  luxuries,  such  as 
distilled  liquors,  had  been  increased,  as  were  also  the 
stamp  and  license  taxes ; 1  but  still  the  receipts  from  in- 
ternal sources  were  comparatively  light,  and  the  general 
acquiescence  of  the  public  in  the  earlier  measures  led  the 
i  Act  of  March  7,  1864. 


64  THE  INTERNAL  REVENUE  SYSTEM. 

secretary  to  recommend  still  further  resort  to  taxation. 
In  compliance  with  this  recommendation,  a  bill  was  in- 
troduced into  Congress  which  was  most  sweeping  in  its 
provisions.  The  discussion  which  ensued  brought  up 
the  entire  fiscal  policy  of  the  Administration,  although 
the  opposition  mainly  centred  itself  upon  the  general 
excise  upon  manufactured  products.  In  general  the  bill 
followed  the  lines  outlined  by  earlier  legislation,  al- 
though a  general  increase  in  rates  was  made.  Thus 
the  duty  upon  spirits,  which  had  been  20  and  60  cents 
under  the  earlier  laws,  was  increased  to  $1.50  and 
$2.00  per  gallon  under  the  new ;  upon  smoking  tobacco 
the  tax  was  more  than  doubled,  while  the  tax  upon 
cigars  was  advanced  from  a  maximum  rate  of  $3.50 
per  1,000  to  a  maximum  rate  of  $40.00  per  1,000.  In 
a  like  manner,  although  not  to  such  an  extravagant  ex- 
tent, license  taxes  were  increased,  while  specific  duties 
upon  many  manufactured  products  were  doubled.  The 
general  ad  valorem  rate  was  increased  from  three  to 
five  per  cent  upon  most  articles  included  in  the  former 
schedule,  while  numerous  new  sources  of  revenue  were 
ferreted  out  and  taxed.1 

Nothing  was  omitted,  from  the  raw  product  to  the 
finished  commodity.  Often  an  article  received  a  half- 
dozen  additions  ere  it  reached  the  consumer.  And  not 
only  were  all  the  constituent  elements  which  entered 
into  an  article  taxed,  as  the  bolts,  rivets,  castings,  trim- 
mings, and  the  like,  of  an  engine,  but  the  engine,  when 
completed,  was  subject  to  an  additional  ad  valorem  duty 
upon  its  value ;  while  all  repairs  which  increased  the 
value  of  an  article  ten  per  cent  were  rendered  dutiable 
J  The  date  of  the  passage  of  the  measure  is  June  30,  1864. 


THE  PERIOD   OF  THE  CIVIL    WAR.  65 

at  a  like  rate.  It  was  the  most  comprehensive  measure 
in  our  history.  The  tariff  duties  were  also  revised  to 
equalize  the  burdens  upon  the  domestic  producer. 

Speaking  of  the  fiscal  measures  of  this  period,  an 
observant  Austrian  writer  has  said  :  "  The  citizen  of  the 
Union  paid  a  tax  every  hour  of  the  day,  either  directly 
or  indirectly,  for  each  act  of  his  life ;  for  his  movable 
and  immovable  property ;  for  his  income  as  well  as  his 
expenditure ;  for  his  business  as  well  as  his  pleasure. 
Stamps  were  affixed  to  the  smallest  agreement,  and  the 
most  insignificant  bill  of  exchange  bore  a  tax  ranging  in 
amount  from  that  on  a  small  receipt  to  one  of  twenty 
dollars.  Incomes  were  not  only  burdened  by  a  regular 
tax,  but  also  by  an  extraordinary  payment,  while  to 
these  must  be  added  State,  county,  and  municipal  taxes 
of  almost  an  equal  amount."  1 

The  additional  taxes  imposed  upon  manufactured  arti- 
cles by  this  act  were  received  with  unconcealed  opposi- 
tion by  the  producing  interests,  who  insisted  that  the 
tax  was  not  diffused  among  consumers  by  being  added 
to  price,  but  was  taken  almost  wholly  from  their  profits. 
Whatever  view  we  may  take  of  the  ultimate  diffusion  of 
taxes,  it  must  be  admitted  that,  in  its  early  operations, 
an  excise  is  difficult  to  shift,  and  may  work  decided  dis- 
couragement and  injury  to  industry.  Certainly  such 
was  the  case  during  the  period  now  under  discussion ; 
for,  during  the  early  stages  of  the  war,  industry  suffered 
severely  in  accommodating  itself  to  the  changed  condi- 
tions of  trade  and  production.  By  1864,  however,  prices 
had  already  begun  their  upward  flight,  and  had  become 

1  "  Finanzen  und  die  Finanz-Gescliichte  der  Vereinigten  Staaten 
von  Amerika,"  Hock,  p.  191. 


66  THE  INTERNAL  REVENUE  SYSTEM. 

so  elastic  as  to  respond  readily  to  every  change  in  the 
rate  of  taxation,  or  in  the  amount  of  the  circulating 
medium.  The  manufacturers  maintained  an  active  op- 
position, and  memorialized  Congress  to  abolish  the 
general  excise  altogether,  and  to  substitute  therefor  a 
uniform  tax  upon  sales.  Such  a  tax,  they  maintained, 
imposed  at  the  time  of  purchase,  would  be  borne  with 
greater  ease  by  the  people,  and  would  not  offer  the  same 
opportunities  for  evasion  as  a  duty  imposed  at  the  place 
of  manufacture.  The  Commissioner  of  Internal  Revenue 
himself  guardedly  approved  of  the  change,1  the  simpli- 
city and  apparent  ease  of  assessment  commending  it  to 
him.  Oddly  enough,  Adam  Smith  is  quoted  in  defence 
of  the  tax  ;  while,  as  a  matter  of  fact,  if  there  is  one  tax 
which  the  author  of  the  "  Wealth  of  Nations  "  unequiv- 
ocally condemns,  it  is  the  tax  upon  inland  commerce,  to 
the  freedom  from  which  in  England  he  attributes  in 
large  measure  the  prosperity  of  that  country.  Mr.  Mor- 
rill was  most  strenuous  in  his  opposition  to  the  proposed 
change,  which  he  said  was  contrary,  not  only  to  all  the 
laws  of  trade,  but  to  every  sound  principle  of  finance  as 
well.  Its  administration  would  require  the  maintenance 
of  an  army  of  officials  to  guard  the  transportation  and 
sale  of  goods,  and  would  subject  every  manufacturer 
merchant,  or  shopkeeper  to  the  continued  presence  of 
the  tax-gatherer.  It  would  obstruct  trade,  and  be  most 
difficult  of  collection,  and  would  be  in  effect  equivalent 
to  the  erection  of  tariff  barriers  about  every  transaction 
in  the  country.  History  has  sanctioned  these  objections 
of  Mr.  Morrill,  as  well  as  the  adverse  vote  of  Congress 
upon  the  bill ;  for,  as  Adam  Smith  has  shown,  it  was 
1  Report  on  Finances,  18G4,  p.  60. 


THE  PERIOD   OF  TUE  CIVIL    WAR.  67 

the  Alcavala,  or  duty  upon  domestic  commerce,  which 
aggravated  the  revolt  of  the  Netherlands  against  the 
tyranny  of  Spanish  oppression,  and  in  Spain  herself 
caused  the  ruin  of  her  industries.1 

One  of  the  most  anomalous  and  indefensible  provis- 
ions of  the  bill  was  the  tax  upon  repairs,  which,  like 
all  taxes  upon  improvements,  tends  to  discourage  provi- 
dence and  economy.  Further  than  this,  it  was  well-nigh 
impossible  to  collect  it,  inasmuch  as  it  is  in  so  large 
measure  self-assessed.  It  presumes  that  any  increment 
of  value  is  equivalent  to  new  production,  and  should  be 
taxed  accordingly.  The  tax  on  repairs  never  proved 
productive,  the  receipts  for  the  fiscal  year  1866,  the  last 
of  its  operation,  being  but  $848,391.  The  income  tax 
was  also  assessed  by  irritating  methods,  which  rendered 
it  needlessly  unpopular ;  while  the  general  excise  upon 
manufactures  and  products  insisted  upon  many  need- 
less details,  which  aroused  the  opposition  of  the  produ- 
cing interests.  At  the  same  time  the  penalties  for 
fraud  and  attempted  evasion  were  inadequate,  and  did 
not  prove  effective  in  preventing  great  loss  to  the 
revenue. 

At  the  close  of  the  fiscal  year  1864,  Mr.  Chase  re- 
signed the  portfolio  of  office,  and  his  mantle  fell  upon 
the  shoulders  of  Mr.  Fessenden  of  Maine.  As  the  new 
secretary  confesses  in  his  December  report,  the  finances 
of  the  country  were  in  a  most  discouraging  condition. 
The  balance  remaining  in  the  Treasury  was  less  than 
nineteen  millions  of  dollars;  requisitions  remained  un- 
paid amounting  to  seventy-two  millions,  while  certif- 
icates of  indebtedness  outstanding  aggregated  one 
1  "  Wealth  of  Nations,"  Book  V.,  chap.  ii. 


68  THE  INTERNAL  REVENUE  SYSTEM. 

hundred  and  sixty-nine  millions.1  Moreover,  the  pros- 
pect for  the  continued  sale  of  bonds  was  far  from  flatter- 
ing ;  gold  had  reached  the  pinnacle  of  its  upward  flight, 
while  the  pending  election  greatly  depressed  the  money 
market.  The  condition  of  the  revenues  was,  however, 
most  reassuring,  and  during  the  coming  months  began 
to  justify  the  hopes  which  had  been  earlier  reposed  in 
them,  the  excise  alone  not  infrequently  bringing  in  as 
much  as  a  million  dollars  a  day.  From  this  time  on 
to  the  close  of  the  war  the  condition  of  the  Treasury 
was  much  improved,  the  public  securities  regained  credit, 
while  the  actual  receipts  from  the  various  sources  greatly 
exceeded  the  estimates. 

But,  despite  this  gratifying  showing,  Congress,  as 
a  closing  enactment  to  the  long  series  of  fiscal  measures, 
saw  fit  to  increase  the  rates  of  internal  taxation,  already 
oppressively  high  in  many  instances,  by  the  law  of 
March  3,  1865.  By  this  measure  every  possible  article 
which  had  escaped  the  scrutiny  of  the  earlier  Acts  was 
sought  out  and  taxed.  The  general  ad  valorem  rates 
were  increased  twenty  per  cent,  or  to  six  per  cent  upon 
most  manufactured  articles ;  and  provision  was  made  for 
the  appointment  by  the  secretary  of  a  special  Revenue 
Commission  to  inquire  into  and  report  upon  "  the  best 
and  most  efficient  mode  "  of  raising  the  necessary  rev- 
enue for  the  support  of  the  government.  This  was  the 
closing  act  of  the  war,  but  it  did  not  become  operative 
in  time  to  afford  any  relief  to  the  revenues.  As  a  mat- 
ter of  fact,  aside  from  the  invigorating  effect  of  the 
resolute  resort  to  taxation  upon  the  credit  of  the  coun- 
try, neither  the  excise  nor  the  customs  afforded  the 
i  Report  on  Finances,  1864,  p.  19. 


THE  PERIOD   OF  THE  CIVIL    WAR, 


69 


Treasury  any  great  measure  of  support  until  the  most 
urgent  necessity  for  the  same  had  passed.  During  the 
fiscal  years  1861  and  1862,  the  receipts  from  the  former 
source  were  practically  nothing ;  while  in  1863  they  rose 
to  about  $39,000,000,  but  little  more  than  sufficient 
to  meet  the  interest  charges  upon  the  public  debt. 
Even  as  late  as  1865,  the  receipts  from  this  source, 
added  to  those  of  the  customs,  only  exceeded  the  ordi- 
nary civil  expenditure  and  the  interest  on  the  public 
debt  by  $160,000,000,  while  the  total  expenditures  of 
the  Treasury  were  $1,906,430,000.  This  relation  be- 
tween the  revenues  and  expenditure  may  be  more  graph- 
ically exhibited  by  the  following  table,  expressed  in 
denominations  of  millions  :  — 


Collections  and  Expenditure  for  the  Fiscal  T 

fears :  - 

1862. 

1863. 

1864. 

1865. 

1866. 

Miscellaneous  Sources    .... 
Total  Revenue  from  Taxes,  etc., 

Net  Ordinary  Expenditure,  not 
including  Interest  Charges l    . 

49.05 
1.79 

1.0S 

69.0G 

39.12 

4.50 

102.31 
110.21 

52.08 

84.93 

210.66 

38.11 

179.05 

311.20 

67.77 

51.92 
456.38 

112.G8 

694.00 
S99.S1 

264.C0 

811.28 
1295.54 

333.70 

1217.70 
1906.43 

558.02 

385.95 
1139.34 

The  system  was  slow  in  attaining  any  degree  of  effi- 
ciency, owing  to  the  newness  of  the  provisions,  the 
untrained  officials  to  whom  its  administration  was  in- 
trusted, the  constant  tinkering  and  changes  made  in 
it  by  Congress,  and  the  extravagance  of  many  of  the 

1  By  net  ordinary  expenditure  is  meant  expenditure  on  behalf 
of  war,  the  navy,  Indians,  pensions,  and  miscellaneous  purposes. 
Gross  expenditures  includes  the  above  as  well  as  interest,  premi- 
ums, and  other  payments  on  behalf  of  the  public  debt. 


70  THE  INTERNAL   REVENUE  SYSTEM. 

taxes,  which  were  so  high  as  to  induce  wide-spread 
evasion  and  fraud,  often  with  the  connivance  and  assist- 
ance of  the  officials.  It  may,  in  fact,  be  stated  as  a 
principle,  that  the  experience  of  this  period  goes  to  prove 
that  in  time  of  peace  the  machinery  for  immediately 
realizing  upon  the  currently  created  wealth  of  the  country 
should  never  be  permitted  to  get  out  of  running  order  ;  for 
had  there  existed  in  1861  some  form  of  internal  taxes 
with  which  the  people  were  familiar,  and  which  was 
sufficiently  elastic  to  permit  immediate  extension,  the 
Treasury  would  not  have  suffered  from  the  straits  to 
which  it  ivas  reduced,  the  necessity  of  resort  to  treasury 
notes  might  have  been  averted,  and  the  war  been  more 
vigorously  prosecuted. 

As  it  was,  the  internal  system  was  of  substantial  ser- 
vice less  from  any  real  contribution  afforded  to  the  Treas- 
ury, than  from  the  support  which  it  gave  to  the  credit 
of  the  country  and  thus  to  the  conduct  of  the  war. 
And  as  such  the  excise  was  well-nigh  indispensable,  as 
it  was  to  the  plans  of  reconstruction  set  on  foot  at  the 
close  of  the  war. 

And  Congress,  aided  by  the  counsels  of  the  Secretary 
of  the  Treasury,  and  the  later  appointed  Special  Com- 
missioner of  Revenue,1  now  found  itself  confronted  with 
the  problem  of  how  to  raise  the  revenue  demanded  by 
the  contemplated  reduction  of  the  public  debt,  the  pay- 

1  Mr.  David  A.  "Wells,  the  chairman  of  the  Revenue  Commission 
appointed  under  authority  of  the  Act  of  March  3,  1865,  was  subse- 
quently selected  as  Special  Commissioner  of  Revenue  under  an  Act  of 
July  13,  1866,  whose  duties  it  was  to  investigate  and  from  time  to 
time  "report,  through  the  Secretary  of  the  Treasury,  to  Congress, 
either  in  the  form  of  a  hill  or  otherwise,  such  modifications  of  the 
rate  of  taxation,  or  of  the  methods  of  collecting  the  revenues,  and 


THE  PERIOD   OF  THE  CIVIL    WAR.  71 

ment  of  the  interest  charges  thereon,  and  the  mainte- 
nance of  the  civil  establishment,  including  the  war  and 
navy  departments,  by  means  which  should  neither  re- 
press industry  nor  check  enterprise,  and  which,  at  the 
same  time,  should  be  so  devised  as  to  bear  most  heavily 
upon  those  most  benefited  by,  and  most  capable  of  bear- 
ing, the  taxes.  The  circulating  medium  was  redundant, 
and  consisted  largely  of  inconvertible  paper ;  a  large 
floating  indebtedness  had  to  be  funded,  while  early 
loans  now  falling  due  were  to  be  reissued,  and  the  debt 
simplified  and  rendered  manageable ';  the  Southern  States 
were  to  be  rehabilitated  with  Union  vestments,  and  the 
wheels  of  commerce  readjusted  to  changed  economic 
conditions.  A  reduction  of  the  currency  to  reasonable 
proportions  was  demanded  by  every  consideration  of 
public  welfare,  while  the  monetary  vacuum  in  the  South 
was  to  be  supplied.  A  war  tariff  called  for  revision  in 
harmony  with  the  demands  of  expanding  trade  and  en- 
larged commercial  relations,  while  the  obstructive  taxes 
on  raw  materials,  and  the  burdens  of  the  inland  duties, 
so  prejudicial  to  that  wide  commercial  activity  so  soon 
to  follow,  required  immediate  attention. 

At  this  time  the  total  indebtedness  of  the  country, 
floating  and  funded,  approximated  three  thousand  mil- 
lions, upon  which  the  interest  charges,  funded  at  five 
and   one-half  per  cent,   amounted  to  one   hundred  and 

such  other  facts  pertaining  to  the  trade,  industry,  commerce,  or  taxa- 
tion of  the  country,  as  he  may  find,  by  actual  observation  of  the  law, 
to  be  conducive  to  the  public  interest."  Tbe  Special  Commissioner 
made  four  annual  reports,  and  his  statistical  investigations  cover 
almost  every  aspect  of  the  financial,  industrial,  and  monetary  dis- 
orders induced  by  the  war,  and  form  a  mine  of  information  to  the 
student  of  the  period. 


72  THE  INTERNAL   REVENUE  SYSTEM. 

sixty-five  million  dollars,  while  the  civil  establishment, 
with  the  war  and  navy  departments  added,  demanded  a 
hundred  millions  more.  The  customs  revenue  and  mis- 
cellaneous sources  were  producing  one-half  that  amount, 
so  that  a  simplification  of  the  inland  taxes  so  as  to 
render  them  productive  of  two  hundred  millions,  would, 
it  was  thought,  suffice  for  current  expenditure  and  per- 
mit an  annual  sinking  fund  appropriation  of  fifty  mil- 
lions of  dollars.  This,  in  effect,  the  secretary  advised.1 
The  special  Revenue  Commission,2  provided  for  in 
the  Act  of  March  3,  1865,  began  its  investigations  at 
once,  and  eventually  did  much  to  bring  order  out  of  the 
existing  confusion.  It  travelled  from  city  to  city,  heard 
representatives  of  the  various  industrial  interests,  and 
in  January  following  presented  the  results  of  its  investi- 
gations to  Congress  in  a  most  voluminous  and  valuable 
report,  which  was  made  the  basis  of  later  modifications 
in  the  customs  and  the  excise.  The  creation  of  such  a 
commission  Avas  a  novelty  in  congressional  procedure, 
although  it  finds  frequent  precedents  abroad,  and  since 
tliat  time  has  been  employed  in  this  country  in  the  tariff 
investigation.  When  composed,  as  this  Commission  was, 
of  men  apart  from  active  participation  in  the  affairs  of 
government,  and  untrammelled  by  personal  interests  or 
a  constituency  to  be  gratified,  and  possessed  of  a  practi- 
cal and  scientific  knowledge  of  the  laws  of  trade  and 
finance,  such  a  method  of  dealing  with  questions  de- 
manding special  scientific  knowledge  possesses  decided 

1  Ileport  on  Finances,  18G5,  p.  20. 

2  The  Commission  as  appointed  consisted  of  David  A.  "Wells  of 
New  York,  Stephen  Colwell  of  Pennsylvania,  and  S.  S.  Hayes  of 
Illinois. 


THE  PERIOD   OF  THE  CIVIL    WAR.  73 

advantages   over  the    congressional   committee    system, 
frequently  partisan  and  seldom  wholly  unbiassed. 

After  reviewing  the  legislation  of  the  period,  as  well 
as  the  various  taxes  imposed,  the  Commission  recom- 
mended "  the  abolition  or  speedy  reduction  of  all  taxes 
which  tend  to  check  development,  and  the  retention  of 
all  those  which,  like  the  income  tax,  fall  chiefly  upon 
realized  wealth."  "  Diffuseness  "  was  the  all-pervading 
evil  of  the  system,  to  which  many  of  the  industrial  ills 
of  the  time  were  more  or  less  directly  traceable ;  for  by 
its  operations  it  violated  nearly  every  sound  principle  of 
finance,  was  most  oppressive  to  the  consumer,  and  in- 
jurious in  its  effects  upon  industry.  A  more  "concrete" 
system  was  demanded  by  the  conditions  of  the  country, 
to  obtain  which  desideratum  the  Commission  made  the 
following  specific  recommendations :  First,  that  the  rate 
upon  distilled  spirits  be  reduced  to  one  dollar  per  gallon 
(not  adopted)  ;  second,  that  the  excise  tax  upon  raw 
cotton  be  increased  to  five  cents  per  pound  (Congress 
raised  the  tax  to  three  cents,  and  later  abolished  it  alto- 
gether) ;  third,  that  the  principle  of  progression  or  dis- 
crimination in  the  income  tax  be  repealed,  that  a  uniform 
rate  of  five  per  cent  be  imposed  on  all  incomes  in  excess 
of  $1,000,  and  that  no  further  exemptions  for  house-rent 
be  allowed,  or,  if  such  exemption  be  allowed,  that  it  be 
limited  in  amount  to  f  300  (adopted  in  18G7) ;  fourth, 
that  all  assessed  taxes,  save  those  on  billiard  tables,  be 
repealed  (not  adopted)  ;  fifth,  that  the  excise  upon 
wearing  apparel,  repairs,  pig  iron,  books,  magazines, 
etc.,  coal,  and  crude  petroleum,  be  abolished,  while  the 
general  ad  valorem  and  specific  taxes  upon  goods,  wares, 
and  merchandise  be  horizontally  reduced  fifty  per  cent. 


74  THE  INTERNAL  REVENUE  SYSTEM. 

(Partially  adopted  by  Acts  of  July  13,  1876,  and  March 
2, 1867.)  Only  with  some  such  alterations  as  these  would 
the  system  of  raising  revenues  from  inland  sources  be 
"  adapted  to  the  age  and  our  conditions ;  the  only  one 
compatible  with  great  fiscal  results  and  with  that  large 
freedom  of  industry  which  alone  can  ever  adequately 
supply  the  coffers  of  an  enterprising,  competitive,  and 
free  people."  1  The  report  further  arraigned  the  appoint- 
ment, retention,  and  promotion  of  officials  for  other 
reasons  than  qualifications  of  merit  and  good  behavior. 
With  this  method  continued,  the  Commission  felt  that  it 
would  be  idle  to  hope  for  an  efficient  and  economical  ad- 
ministration of  the  system.  To  this  cause  was  assigned 
much  of  the  inefficiency  of  the  officials,  as  well  as  the 
wide-spread  fraud  and  evasion  of  taxes.  Men  were  not 
infrequently  appointed  wholly  incapable  of  appreciating 
the  duties  of  their  office,  while  others  were  removed 
because,  in  the  faithful  discharge  thereof,  they  had 
interfered  with  the  private  interest  of  wealthy  and 
influential  individuals. 

But  Congress  paid  slight  heed  to  these  recommen- 
dations ;  for  the  adjustment  and  speedy  reduction  of 
the  public  debt  was  the  chief  object  of  solicitude,  not 
only  on  the  part  of  the  government,  but  of  the  people 
as  well,  who  manifested  an  incomprehensible  impatience 
at  the  thought  of  indebtedness ;  and  many  wild  schemes 
were  afloat  for  its  immediate  payment,  it  being  even 
proposed,  under  the  elation  of  temporary  prosperity,  to 
extinguish  it  by  voluntary  contributions  and  have  done 
with  it  forever.     For  this  reason  the  recommendations 

1  See  Report  of  Revenue  Commission,  House  Ex.  Doc.  No.  34, 
Thirty-ninth  Congress,  First  Session,  pp.  23-41. 


THE  PERIOD   OF  THE  CIVIL    WAR.  75 

looking  to  an  abatement  of  the  taxes  found  but  little  im- 
mediate favor,  either  within  or  outside  of  the  halls  of 
Congress.  For  some  months  the  country  enjoyed  a  reac- 
tion of  enthusiasm  and  joy  after  the  protracted  years  of 
despondency ;  and  just  as  France,  a  few  years  later, 
shaken  by  discord  and  faction,  after  the  disasters  of 
Sedan  and  the  excesses  of  the  Commune,  collected  her 
shattered  energies,  so  the  Union,  reunited,  vacillated  for 
the  moment,  weak  at  heart,  and  then,  with  a  mighty 
effort,  indifferent  alike  to  the  false  steps  of  the  past  or 
forebodings  for  the  future,  set  herself  resolutely  at  work 
to  repair  the  breaches  in  her  armor,  and  to  develop  the 
resources  of  her  hidden  power.  No  fact  of  our  history 
demonstrates  the  wonderful  recuperative  power  of  the 
United  States  as  does  this ;  for  no  people  in  modern 
times  took  from  their  pockets  two  hundred  millions 
of  dollars  with  which  to  reduce  the  public  debt  within 
twelve  months  after  the  close  of  a  domestic  struggle 
of  four  years'  duration,  no  nation  ever  assimilated  to 
itself  nearly  a  million  of  men  with  so  little  friction 
or  disturbance,  and  none  has  borne  so  uncomplainingly 
a  system  of  taxation  most  oppressive  in  its  incidence 
for  the  defence  of  a  principle.  The  country  was  but 
wounded,  and  the  sympathetic  energies  rushed  to  her 
recuperation  in  the  vast  industrial  development  which 
followed  in  the  first  few  years  subsequent  to  the  termi- 
nation of  the  war.  Immigration  poured  into  the  coun- 
try, following  the  great  railroads  westward,  crops  were 
bountiful,  and  the  prices  of  farm  products  ranged  high. 
An  era  of  unparalleled  railroad  construction  set  in,  and 
iron  bands  soon  united  the  Atlantic  with  the  Pacific. 
Labor  was  constantly  employed  at  high  wages,  and  the 


76  THE  INTERNAL  REVENUE  SYSTEM. 

South  began  to  reassume  the  prosperity  it  had  known 
before  the  war,  while  the  prairies  of  the  new  West 
began  to  blossom  as  the  rose. 

But  this  prosperity  and  overweening  confidence  were 
short-lived.  During  the  war  the  withdrawal  of  labor 
and  the  consumption  of  the  army  in  part  compensated 
for  the  inroads  of  the  State;  but  with  the  return  of 
peace  conditions  were  reversed.  Production  was  stimu- 
lated in  excess  of  demand,  an  unhealthy  spirit  pervaded 
all  enterprise,  prices  were  speculative  and  uncertain,  and 
while  in  general  the  country  bore  every  appearance  of 
prosperity,  industry  was  in  a  state  of  flux,  and  was  under- 
going a  process  of  readjustment  in  harmony  with  peace 
conditions.  Hard  times  followed  for  many  on  the  heels 
of  diminished  government  demand,  and  the  burdens  of 
taxation  soon  became  unendurable,  while  the  inquisition 
and  official  penetration  into  business  affairs  induced  wide- 
spread complaint  at  its  continuance.  So  long  as  the  war 
lasted  taxes  were  borne  willingly,  and  paid  with  patriotic 
pride  ;  but,  with  peace  re-established,  selfish  interests 
reasserted  themselves,  and  the  critical  eye  of  public  opin- 
ion, diverted  from  graver  affairs,  soon  perceived  the  evils 
innumerable  which  pervaded  the  fiscal  administration. 

At  the  same  time  the  revenues  continued  in  excess  of 
expenditures,  while  receipts  from  specific  sources  of  tax- 
ation frequently  exceeded  expectations.  The  financial 
outlook  being  so  reassuring,  Congress,  in  the  summer  of 
18G6,  took  the  recommendations  of  the  Commission  seri- 
ously in  hand,  and  in  a  rough  way  made  them  the  basis 
of  subsequent  legislation. 

The  Act  of  July  13,  1866,  which  rendered  unmanu- 
factured cotton  dutiable  at  the  rate  of  three  cents  per 


THE  PERIOD   OF  TEE  CIVIL    WAR.  77 

pound,  provided  also  for  a  horizontal  reduction  of  twenty 
per  cent  of  nearly  all  ad  valorem  duties,  or  to  five  per 
cent  of  the  valuation  of  the  article;  while  on  many 
others,  notably  boots  and  shoes,  clothing,  and  other 
articles  of  wearing  apparel,  the  rate  was  reduced  to 
two  per  cent.  The  taxes  on  coal,  pig  iron,  books,  and 
magazines  were  wholly  repealed,  as  was  the  duty  on 
crude  petroleum  a  few  months  later ;  while  sensible  relief 
was  given  the  manufacture  of  sugar,  cordage,  steel,  iron 
chains  and  cables,  as  well  as  railroad  freights.  From 
these  abatements  a  reduction  in  the  revenues  of  from 
fifty  to  sixty-five  millions  was  expected. 

For  the  fiscal  year  1866,  the  receipts  from  the  in- 
ternal duties  were  $310,906,984.  In  1867  they  fell  to 
$265,920,474.  A  comparison  of  these  receipts  indicates 
a  loss  of  thirty-two  millions  from  the  abatement  of  the 
taxes  on  manufactures  and  products,  of  four  millions 
on  gross  receipts  of  corporations,  advertisements,  etc., 
and  of  ten  millions  from  banks,  railroad  companies,  and 
other  corporations  ;  or  a  total  loss  of  forty-five  millions. 
This  exhibit  is  somewhat  remarkable  in  view  of  the 
fact  that  the  taxes  abated  or  repealed  by  the  Thirty- 
ninth  Congress  were  estimated,  on  the  basis  of  their 
productivity  for  the  preceding  year,  as  sufficient  to 
occasion  a  loss  to  the  revenue  of  one  hundred  millions. 
As  a  matter  of  fact,  the  real  diminution  to  the  revenues 
from  these  sources  was  not  in  excess  of  from  sixty  to 
seventy  million,  the  losses  being  in  large  part  compen- 
sated for  by  the  greater  productivity  of  a  low  rate,  and 
the  increase  in  the  consumption  of  certain  kinds  of  com- 
modities;  so  that  the  Treasury  showed  a  net  gain  of 
from  fifteen  to  twenty-five  million  dollars  for  the  year. 


78  THE  INTERNAL  REVENUE  SYSTEM. 

In  the  following  session1  the  rate  on  cotton  was  re- 
duced to  two  and  one-half  cents  per  pound,  while  still 
further  concessions  were  made  to  the  producing  interests 
in  the  exemption  of  ropes  and  twines,  bar,  sheet,  and 
plate  iron,  castings  of  iron  and  copper,  clothing,  certain 
manufactures  of  wood,  agricultural  implements,  oil  of 
various  kinds,  pottery,  salt,  steel,  and  large  numbers  of 
articles  of  general  and  domestic  consumption.  The  in- 
come tax  was  also  amended  in  conformity  with  the  rec- 
ommendation of  the  Commission  by  the  increase  of  the 
exemption  allowed  to  one  thousand  dollars,  with  a  uni- 
form rate  of  five  per  cent  upon  all  incomes  in  excess  of 
that  sum,  while  the  gross  receipts  tax  as  applied  to 
advertisements  and  toll  roads  was  repealed.  Cotton 
was  relieved  from  taxation  a  year  later ; 2  while  the  ex- 
cessive rate  upon  distilled  spirits,  i.e.,  two  dollars  per 
gallon,  was  retained  until  July  of  the  same  year,3  when 
the  rate  was  reduced  to  fifty  cents.  During  the  same 
session  of  the  Fortieth  Congress  all  taxes  upon  goods, 
wares,  and  manufactures,  save  those  imposed  on  gas,  illu- 
minating oils,  tobacco  in  its  various  forms,  distilled  and 
malt  liquors,  banks,  and  those  articles  upon  which  the 
tax  was  collected  by  means  of  stamps,  were  repealed.4 

This  action  on  the  part  of  Congress  was  sudden  and 
unexpected.  Moreover,  it  was  viewed  as  but  experi- 
mental and  possibly  temporary  in  its  duration.5  As  a 
consequence    of   this   and    other   contributory   agencies, 

i  By  Act  of  March  2,  18G7.  3  Act  of  July  20,  18G8. 

2  Act  of  Feb.  3,  18G8.  4  Act  of  March  31,  1868. 

5  This  feeling  was  induced  in  part  hy  the  recommendation  of  the 
secretary  advocating  a  reimposition  of  the  general  excise  on  manu- 
factures, as  well  as  an  increase  in  the  duty  on  sales.  Report  on 
Finance,  1868,  p.  14. 


THE  PERIOD   OF  THE  CIVIL    WAR.  79 

prices  failed  to  respond  in  anything  like  the  degree 
anticipated  by  the  reduction  in  rates.  In  the  case  of  a 
number  of  articles,  notably  pig  iron,  manufactured  lum- 
ber, and  salt,  the  prices  continued  to  advance ;  "  while  in 
other  instances,  as  in  the  case  of  agricultural  imple- 
ments, sewing-machines,  hoop-skirts,  manufactures  of 
silk,  newspapers,  and  in  fact  most  articles  which  are  the 
products  of  monopolies  created  by  patents,  established 
custom,  or  other  causes,  the  repeal  of  the  internal  tax, 
through  the  maintenance  of  former  prices,  has  been  only 
equivalent  to  legislating  a  bounty  into  the  pockets  of 
the  producer."  x 

The  course  of  trade  during  these  years  of  reorganiza- 
tion was  more  or  less  arbitrary,  and  characterized  by  the 
same  phenomena  which  marked  the  early  days  of  the 
war.  Industry  was  slow  in  accommodating  itself  to 
the  changing  conditions  of  production,  and  commercial 
failures  were  frequent.  In  those  cases  in  which  prices 
responded  to  the  reduction  of  the  taxes,  individuals 
were  often  ruined  by  being  forced  to  unload  upon  a 
declining  market  goods  produced  or  purchased  at  arti- 
ficially enhanced  prices  ;  while  in  others  the  reduction  or 
abolition  of  the  tax  was  but  a  bonus  granted  to  the  man- 
ufacturer in  the  form  of  enhanced  profits.  Speculation 
was  rife,  and  values  wholly  unsettled.  To  what  extent 
this  abnormal  condition  of  trade  and  industry  was  at- 
tributable to  the  reduction  of  the  excise  it  is  difficult 
accurately  to  determine,  but  so  able  an  authority  as 
Hon.  A.  S.  Hewitt  has  considered  it  so  potent  as  to 
ascribe  to  it  the  financial  revulsion  of  1873. 

Within  three  years  after  the  close  of  the  war,  the 
i  Report  Special  Commissioner  of  Revenue,  1868,  p.  23. 


80  THE  INTERNAL  REVENUE  SYSTEM. 

more  important  recommendations  of  the  Revenue  Com- 
mission had  been  substantially  adopted,  and  all  of  the 
more  discriminating  and  oppressive  taxes  had  been  re- 
pealed. No  direct  taxes  "were  now  imposed  on  any 
manufactured  product,  with  the  exception  of  distilled 
spirits,  fermented  liquors,  cigars,  tobacco,  gas,  patent 
medicines,  perfumes,  cosmetics,  and  playing-cards,  all 
of  which  articles  are  in  the  nature  of  luxuries. 

For  some  years  longer  the  special  license,  stamp,  cor- 
poration, and  income  taxes  "were  retained ;  although  the 
gratifying  condition  of  the  finances,  and  the  continued 
excess  of  receipts  over  expenditures,  had  rendered  a 
more  speedy  reduction  possible.  By  1870,  however,  the 
debt  having  been  in  large  part  refunded,  'and  the  re- 
ceipts from  the  customs,  distilled  and  malt  liquors,  and 
tobacco  manifesting  a  gratifying  increase,  all  the  taxes 
save  those  now  on  the  schedule,  as  well  as  the  income 
duty,  certain  stamp  taxes  on  transfers,  proprietary  arti- 
cles, and  some  others,  were  repealed,  including  all  ordi- 
nary taxes  on  occupations,  saving  those  on  brewers, 
distillers,  and  dealers  in  tobacco.  The  income  tax  was 
to  continue  two  years  longer,  with  the  rate  reduced  to 
two  and  one-half  per  cent  upon  incomes  in  excess  of 
$2,000,  while  liberal  deductions  were  permitted  for 
taxes,  losses,  interest  and  rent  paid,  and  debts  ascer- 
tained to  be  worthless.1 

Few  decades  in  our  history  are  more  replete  with  in- 
terest for  the  financier  than  the  one  under  discussion. 
Some  of  these  phases  have  been  examined  in  the  pre- 
ceding pages,  and  it  but  remains  to  indicate  briefly  two 
deductions,  one  might  say  axioms,  which  may  be  drawn 
i  Act  of  July  14,  1870. 


THE  PERIOD   OF  THE  CIVIL    WAR.  81 

from  the  experiences  of  the  same.  The  first  of  these  is, 
that  time  is  a  most  essential  requisite  to  efficiency  in  an 
excise  system.  A  new  bureau  of  administration,  with  its 
army  of  officials  and  a  vast  continent  from  which  to  gar- 
ner its  resources,  is  a  ponderously  moving  machine,  and 
cannot  achieve  efficiency  in  a  day  or  even  in  a  year.  For 
this  reason  the  taxing  machinery  of  a  nation  should  never 
be  permitted  to  get  out  of  running  order ;  for,  as  has  been 
said,  the  customs  revenue  is  a  most  unstable  basis  upon 
which  to  depend  for  the  revenues  in  times  of  emergency. 
As  a  second  principle,  it  may  be  added  that  a  moderate 
rate  of  taxation,  assessed  ivith  due  regard  to  existing 
conditions,  will  in  the  long  run  prove  more  productive 
and  less  prejudicial  to  the  moral,  social,  and  industrial 
interests  of  a  nation,  than  one  so  excessive  in  amount  as 
to  encourage  evasion,  speculation,  and  fraud.  The  truth 
of  these  principles  is  in  part  verified  by  an  examination 
of  the  excise  receipts  during  the  five  years  extending 
from  the  close  of  the  war  down  to  1870,  which  coincide 
with  the  reduction  of  the  system.  During  this  period 
taxes  were  removed  from  subjects  from  which  the  aggre- 
gate receipts  in  18GG  had  been  approximately  two  hun- 
dred millions,  yet  the  total  loss  to  the  revenue  thereby 
was  less  than  one  hundred  and  twenty-five  millions,1  and 
this  in  a  period  of  partial  failure  of  crops  and  general 
disturbance  of  business  relations. 

1  According  to  the  estimates  of  Congress,  the  sources  abandoned 
might  have  been  expected  to  reduce  the  revenue  by  the  following 
amounts  :  — 

Act  of  July  13,  18GG by    G5  millions. 

Act  of  March  2,  18G7 by    40  millions. 

Act  of  Feb.  3,  18G8 by   23  millions. 

Act  of  March  31,  and  July  20,  1SG8  ...    by    68  millions. 

Total  estimated  reduction 196  millions. 


82  THE  INTERNAL   REVENUE  SYSTEM. 


CHAPTER  IV. 

DIRECT    TAXES    ON    PERSONS    AND    PROPERTY. 

I.     THE    DIRECT    OR    APPORTIONED    STATE    TAX. 

In  the  preceding  pages,  there  has  been  traced  the 
process  by  which  the  mass  of  revenue  legislation  induced 
by  the  war  became  incorporated  into  our  fiscal  order. 
In  the  following  chapters  it  will  be  our  aim  to  examine 
the  several  more  important  taxes  in  some  detail,  as  well 
as  the  social  and  economic  forces  set  in  motion  by  them ; 
their  influence  upon  industry,  prices,  and  wages;  and 
finally  to  determine  from  the  teachings  of  the  same  the 
relative  efficiency  and  availability  of  each  in  case  of 
emergency.  And  first  as  to  the  direct  or  apportioned 
State  tax,  which,  with  the  income  tax,  was  the  first  of 
the  many  taxes  imposed. 

In  general,  the  method  employed  in  the  assessment 
and  collection  of  the  direct  tax  of  1798  served  as  a 
model  for  all  subsequent  experiments  in  deriving  rev- 
enues from  a  tax  apportioned  among  the  States,  of 
which,  as  we  have  seen,  there  were  four,  viz.,  in  1813, 
1814,  1815,  and  1861. 

The  measure  of  1798,  which  apportioned  $2,000,000 
among  the  States,  offended  local  prejudices  needlessly, 
and  was  for  this  reason  extremely  unpopular.  Viewed, 
however,  as  a  political  measure,  it  had  more  to  commend 
it.     The  tax  was  levied  but  once,  being  marked  for  the 


DIRECT  TAXES  OX  PERSOXS  AXD  PROPERTY.     83 

axe  of  the  new  administration,  which  came  into  power 
pledged  to  its  repeal.  State  lines  were  wholly  ignored 
by  it,  save  in  so  far  as  they  served  as  administrative 
divisions.  Houses,  lands,  and  slaves  formed  the  basis 
of  the  levy,  and  an  exemption  of  $500  was  allowed. 

The  later  Acts  evoked  by  the  stress  of  the  War  of 
1812  differ  in  some  details  from  the  earlier  tentative 
efforts  of  the  Federalists.  Greater  latitude  was  allowed 
the  States  in  their  collection,  the  States  being  granted 
permission  to  assume  their  quotas,  which  was  an  im- 
portant modification,  while  the  stipulation  of  Con- 
gress that  they  should  be  but  temporary  and  confined 
to  war  necessities  rendered  them  more  tolerable  to  the 
people. 

These  earlier  precedents  formed  the  groundwork  of 
the  Act  of  Aug.  5,  1861 ;  although,  as  we  have  seen, 
the  recommendations  of  Secretary  Chase  did  not  fully 
comply  with  the  constitutional  provision,  inasmuch  as  he 
suggested  the  exemption  of  the  slave  States  from  its 
imposition,  thereby  tacitly  acknowledging  their  sever- 
ance from  the  Union. 

By  the  measure  of  1861  the  same  privilege  of  assump- 
tion was  granted  the  States  as  permitted  in  the  earlier 
Acts  of  1813  and  1815 ;  in  fact,  earlier  precedents  were 
so  closely  followed  that  it  was  asserted  in  the  House  that 
the  measure  was  an  exact  copy  of  a  bill  drawn  up  at  an 
earlier  date  by  Gallatin.1  What  commended  the  tax  to 
the  Committee  of  Ways  and  Means  was  the  pressing  de- 
mand for  revenue,  and  the  belief  that  the  States  would 
at  once  assume  their  quotas,  and  place  at  the  immediate 
disposition  of  the  government  considerable  revenue.  It 
i  Congressional  Globe,  18G1,  p.  307. 


84  THE  INTERNAL   REVENUE  SYSTEM. 

is  this  fact  which  renders  the  direct  tax  so  fit  an  emer- 
gency tax.  Moreover,  it  was  familiar  to  the  people 
through  their  State  systems. 

But  while  such  considerations  as  these  may  possibly 
justify  such  a  tax  as  a  temporary  war  measure,  as  a  sort 
of  bridge  upon  which  a  fiscal  policy  may  be  inaugurated 
and  the  capital  and  trade  of  the  country  accustomed  to 
changed  conditions,  any  attempt  to  meet  heavy  or  long 
continued  demands  from  this  source  would  be  inadvi- 
sable. Even  admitting  that  the  tax  conformed  roughly  to 
justice  a  hundred  years  ago,  when  population  was  a  rough 
criterion  of  the  ability  of  the  States  to  pay,  it  must  be 
apparent  that  the  unequal  territorial  distribution  of 
wealth  at  the  present  time  renders  even  an  approxima- 
tion to  justice  impossible.  Even  in  1861  it  was  very 
unequal  in  its  operations,  and  the  imperative  necessities 
of  the  occasion  form  the  only  justification  of  its  pas- 
sage; but  in  view  of  the  small  returns  therefrom,  as 
well  as  the  endless  complications  which  its  adminis- 
tration aroused,  it  is  difficult  to  believe  that  occasions 
will  again  arise  sufficiently  urgent  to  warrant  its  repe- 
tition. 

The  measure  provided  for  a  levy  of  twenty  million 
dollars,  to  be  apportioned  among  free  and  slave  States 
alike,  according  to  population.  Only  land  and  improve- 
ments were  to  be  taxed,  the  enumeration  to  be  taken  on 
the  first  day  of  April,  1862.  A  minimum  exemption  of 
$500  was  allowed  each  taxable,  as  in  the  earlier  meas- 
ures. The  Act  further  provided  that  expenditures  made 
by  the  States  in  military  preparations  might  be  deducted 
in  the  adjustment  of  quotas,  a  provision  which  greatly 
reduced  the  assistance  derived  from  the  tax,  the  only 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.     85 

service  which  it  rendered  being  the  support  which  it 
gave  to  the  public  securities.1 

All  of  the  States,  save  Delaware,  the  Territory  of 
Colorado,  and  the  States  in  insurrection,  assumed  their 
apportionments,  thus  verifying  the  hopes  of  Congress 
and  greatly  simplifying  the  collection.  In  the  two 
Northern  Commonwealths  which  declined  to  assume 
the  levy,  tax  commissioners  were  appointed,  who  at 
once  proceeded  with  the  assessment  of  the  quotas  as 
prescribed  by  Congress;  while  special  provisions  were 
made  for  its  administration  in  the  Southern  States, 
where,  in  case  the  tax  was  repudiated,  it  became  a 
first  lien  on  all  the  lands  in  the  State.  As  rapidly 
as  Federal  authority  was  extended  to  these  sections, 
commissioners  were  appointed  with  plenary  powers 
to  distrain  and  sell  real  estate  covered  by  the  levy, 
the  amount  assessed  to  each  individual  being  deter- 
mined by  the  proportion  his  estate  bore  to  the  taxable 
property  of  the  Commonwealth. 

In  order  to  alleviate  the  hardness  of  the  law,  liberal 
terms  were  granted  on  which  land  might  be  redeemed 
by  the  dispossessed  owner;  but,  despite  this  privilege, 
large  tracts  in  the  South  remained  in  the  hands  of 
the  government,  and  many  persons  were  ousted  from 
ancestral  holdings  through  no  real  fault  of  their  own 
or  disinclination  to  pay  the  taxes. 

Congress  further  provided  that,  of  the  proceeds  de- 

1  The  receipts  covered  into  the  Treasury  from  the  assessment  of 
18G2  down  to  the  year  1870  were  as  follows :  — 

1S0-2  ....  §1,795,332  1866  ....  $1,974,764 

1863  ....  1,485,104  1867  ....  4,200,234 

1864  ....  475,104  1868  ....  1,788,146 

1865  ....  1,200,573  1860  ....  7G5.G86 


86  TIIE  INTERNAL   REVENUE  SYSTEM. 

rived  from  the  sale  of  these  lands,  one-fourth  was  to 
be  returned  to  the  State  on  the  suppression  of  the 
Rebellion,  to  be  used  in  such  a  way  as  the  State  might 
direct ;  one-fourth  was  to  be  placed  in  a  fund  to  be 
used  for  the  promotion  of  colonization  from  the  State 
to  some  tropical  clime ;  while  the  balance  was  to  be 
turned  into  the  Federal  Treasury.1 

By  the  close  of  the  war  the  tax  had  been  partially 
collected  in  Florida,  South  Carolina,  Virginia,  Tennes- 
see, Louisiana,  North  Carolina,  and  Arkansas,  from 
which  States  $ 632,994  had  been  obtained  through 
the  process  of  sales,  while  S420,661  had  been  collected 
by  regular  assessment  at  an  approximate  cost  of  thir- 
teen per  cent.2  Moderate  though  the  taxes  were,  it  was 
well-nigh  impossible  to  collect  them.  Currency  was 
scarce,  the  markets  insecure,  and  production  precarious 
and  almost  at  a  standstill,  owing  to  the  scarcity  of  labor 
and  machinery.  At  the  close  of  the  war  the  distress  in 
the  South  was  well-nigh  universal ;  and  the  committee 
on  reconstruction,  in  reporting  the  Fourteenth  Amend- 
ment of  the  Constitution  to  Congress,  recommended  that 
any  State,  upon  ratification  of  the  same,  should  be  al- 
lowed to  assume  its  apportionment  of  the  direct  tax, 
and  be  granted  ten  years  in  which  to  make  payment  of 
the  same.3  Collection  by  distress  had  proceeded  in 
many  districts  down  to  as  late  as  1866,  when  further 
proceedings  were  suspended  by  order  of  the  President, 
in  conformity  with  an  Act  of  Congress.  Pacific  meas- 
ures were  desired  by  all,  and  the  inclination  manifested 

i  Act  of  June  7,  1862. 

2  Report  of  Commissioner  of  Internal  Revenue,  1865,  p.  00. 

3  House  Reports,  1865-1866,  Nov.  30. 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY'.     87 

by  several  of  the  States  to  accept  the  apportionment 
supported  the  recommendation  of  the  committee.  In 
conformity  with  this  sentiment,  a  temporary  extension 
of  time  was  accorded  the  States  until  Jan.  1,  1869,1  the 
special  boards  of  tax  commissioners  were  discontinued,2 
and  the  accounting  and  administration  of  the  tax  turned 
over  to  the  Commissioner  of  Internal  Revenue.  These 
measures  were  passed  without  prejudice  to  the  ultimate 
right  of  Congress  to  proceed  with  the  completion  of  the 
levy ; 3  but  since  that  time  no  attempt  has  been  made 
to  enforce  payment,  and  until  very  recently  Congress 
has  studiously  avoided  considering  the  question,  feeling 
doubtless  that  the  negative  injustice  done  the  many  was 
vastly  preferable  to  equality  secured  to  all  by  a  reopen- 
ing of  the  subject  and  the  consequent  laceration  of  old 
sores. 

In  1883  the  amounts  of  the  assessment  still  outstand- 
ing were  as  follows  :  — 

From  the  Northern  States,  amount  still  unpaid    .     $    455,228 
From  the  States  formerly  in  insurrection     .     .     .       2,725,104 

Total  amount  of  apportionment  unpaid    ....     $3,180,332 

As  seen  in  its  true  light,  this  neglect  worked  a  gross 
injustice.  It  operated  as  a  penalty  upon  the  patriotism 
of  those  who  had  paid  the  tax,  while  an  irreparable 
injury  had  been  done  those  whose  lands  had  been  dis- 
trained and  sold  under  the  levy.  An  attempt  was  made 
to  remedy  this  injustice,  in  part,  by  an  Act  passed  in 
1883  for  refunding  the  surplus  receipts  from  the  sales  of 

i  Act  of  Aug.  3,  I860.  2  Act  of  March  2,  1867. 

3  The  quotas  apportioned  the  Southern  States  amounted  to 
§5,153,891,  of  which  sum  hut  little  over  §2,000,000  had  been  paid. 


88  THE  INTERNAL   REVENUE   SYSTEM. 

land,  for  which  purpose  $190,000  was  appropriated.1 
But  so  long  a  time  had  elapsed,  and  so  unintelligible 
were  the  records,  that  it  was  well-nigh  impossible  to 
identify  those  dispossessed,  and  only  $04,000  was  al- 
lowed on  the  claims  presented.2 

Two  avenues  of  relief  from  this  anomalous  position 
were  open  to  Congress,  either  one  of  which  was  beset 
with  considerable  difficulty.  Either  the  sums  collected 
from  the  States  could  be  refunded  to  them  to  be  dis- 
posed of  as  they  might  see  fit,  or  measures  might  be 
taken  for  continuing  the  collection  of  the  levies  in  those 
States  where  the  apportionment  had  not  been  paid. 
Both  plans  had  adherents  in  Congress.  Originally  the 
tax  had  been  construed  as  a  lien  on  individual  property, 
in  which  the  States  were  only  incidentally  concerned  as 
political  divisions ;  but,  by  the  action  of  Congress  sus- 
pending the  collection,  it  had  been  expected  that  the 
States  would  accept  their  quotas,  and,  acting  upon  this 
hypothesis,  sums  due  the  States  from  the  Federal  gov- 
ernment had  been  credited  to  this  account.  The  legal- 
ity of  this  position  came  up  for  adjudication  before 
the  Supreme  Court ;  and  the  action  of  the  Treasury  was 
held  to  be  unwarranted,  the  determination  of  the  Court 
being  that  the  States  were  in  no  sense  responsible  for  the 
apportionment,  but  that  it  must  be  collected  from  the 
individual  citizens.3  This  decision  relieved  the  States 
from  all  responsibility,  and  threw  the  Federal  govern- 


i  Act  of  March  3, 1883. 

2  Report  of  Commissioner  of  Internal  Revenue,  1891,  p.  40. 

3  U.S.  vs.  Louisiana,  123  U.S.,  p.  37.  For  a  full  exposition  of  this 
complicated  matter,  see  Quarterly  Journal  of  Economics,  vol.  iii., 
p.  450-461,  by  C.  F.  Dunbar. 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.     89 

ment  back  upon  its  original  position.  But  the  pass- 
ing of  three  decades  had  seen  many  changes  in  the 
ownership  of  the  land  originally  affected  by  the  lien; 
and  the  present  owners  could  not  in  justice  be  held 
responsible  for  the  payment  of  the  tax,  while  to  search 
out  the  original  debtors  was  clearly  impossible.  Another 
complication  arose  from  the  changes  which  had  taken 
place  in  values,  much  of  the  land  having  deteriorated 
to  such  an  extent  as  to  be  scarcely  worth  the  amount  of 
the  tax. 

It  was  an  embarrassing  position.  To  proceed  with 
the  collection  of  the  tax  according  to  the  determination 
of  the  Supreme  Court  was  beset  with  almost  insurmount- 
able difficulties,  and  would  have  resulted  in  monumental 
injustice;  while,  on  the  other  hand,  the  relinquishment 
of  the  claims  worked  an  equal  injustice  to  those  who, 
through  loyalty  or  other  motives,  had  paid  the  tax. 

Despite  these  circumstances,  the  lower  House  always 
opposed  any  adjustment  looking  towards  a  solution  of 
the  dilemma.  Several  distinct  measures  passed  the  Sen- 
ate, but  failed  to  become  a  law  through  the  apathy  of 
the  House ;  and  not  until  1891,1  through  the  pressure 
of  local  interests  and  the  desire  to  relieve  the  plethoric 
condition  of  the  public  treasury,  was  legislation  finally 
enacted  which  provided  for  the  remission  of  all  unpaid 
taxes,  the  return  to  the  States  of  all  sums  collected  by 
Federal  or  State  authorities,  and  for  the  relief  of  those 
persons  dispossessed  of  their  lands. 

This  was  probably  the  most  equitable  adjustment  pos- 
sible. To  have  completed  the  collection  at  this  late  day 
would  have  induced  most  crying  injustice,  while  to  have 

i  By  Act  of  March  2,  1891. 


90  THE  INTERNAL   REVENUE   SYSTEM. 

relinquished  the  claims  entirely,  and  to  have  acknowl- 
edged the  experiment  to  be  a  fiscal  error  already  cor- 
rected by  the  lapse  of  time,  would  have  been  but  a  poor 
show  of  justice  to  the  loyal  States,  as  well  as  to  those 
who  in  other  sections  had  been  forced  to  comply  with 
the  law  through  threat  of  distraint. 

II.       THE    INCOME    TAX. 

It  is  a  matter  of  some  surprise,  in  view  of  the  preju- 
dice which  exists  in  the  American  mind  against  any  tax 
which  is  at  all  inquisitorial  in  character,  that  Congress 
should  have  had  recourse  to  the  income  tax  in  1861, x 
when  the  apportioned  direct  tax  was  imposed,  and  be- 
fore any  attempt  had  been  made  to  open  up  the  more 
available  forms  of  indirect  taxation.  Possibly  this  may 
be  explained,  in  part  at  least,  by  the  prevailing  belief 
in  the  early  suppression  of  the  war,  and  by  the  desire 
to  devise  a  system  which  would  be  but  temporary,  im- 
mediately productive,  and  capable  of  extension  in  case 
of  need.  Mr.  Morrill  probably  echoed  the  popular  sen- 
timent when  he  said  in  the  House  that  "  the  income 
duty  was  one  of  the  least  defensible  "  of  the  taxes  pro- 
posed, but  still  worthy  of  retention  because  of  the  "  con- 
siderable class  of  State  officers,  and  the  many  thousands 
who  are  employed  at  a  fixed  salary,  most  of  whom  would 
not  contribute  a  penny  unless  called  upon  through  this 
tax."  2 

By  the  provisions  of  the  measure,  a  tax  of  three  per 
cent  was  imposed  on  all  incomes  in  excess  of  $800,  from 
whatever  source  derived,  save  that  upon  any  income  de- 

i  Act  of  Aug.  5,  1861.        2  Congressional  Globe,  1802,  p.  1796. 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.     91 

rived  from  United  States  securities,  one  and  one-half 
per  cent  should  be  levied.  Upon  the  incomes,  dividends, 
or  rents  accruing  upon  any  property  or  securities  in  the 
United  States,  but  held  by  citizens  resident  abroad, 
there  was  to  be  charged  a  discriminating  tax  of  five  per 
cent,  save  upon  so  much  of  the  income  as  was  derived 
from  Federal  securities.  The  tax  was  assessable  on  the 
first  of  January ;  and  in  computing  income,  all  national, 
State,  and  local  taxes  were  to  be  first  deducted.  The 
duty  was  self-assessed  upon  schedules  prepared  for  the 
purpose,  and  was  based  upon  receipts  for  the  preceding 
year,  irrespective  of  their  source.  In  case  of  failure  on 
the  part  of  the  taxable  to  make  such  return,  the  asses- 
sor was  empowered  to  estimate  the  income,  and  to  add 
thereto  ten  per  cent  as  a  penalty  for  the  default. 

The  tax  was  assessed  but  once  under  this  measure, 
when  Congress,  reassembling  again  in  regular  session, 
passed  modifications  which  substantially  repealed  its 
provisions.1  By  these  alterations  the  exemption  was 
reduced  from  $800  to  $600  ;  the  rates  were  rendered 
slightly  progressive,  incomes  above  $600  and  below 
$10,000  paying  three  per  cent  on  the  excess  above  the 
former  sum,  those  above  the  latter  sum  paying  five  per 
cent.  The  rates  upon  incomes  from  special  sources 
remained  unchanged.  In  order  that  the  tax  might  be 
relieved  of  the  objectionable  feature  by  which  publicity 
was  given  to  incomes,  collectors  were  instructed  by  the 
commissioner  that  returns  of  incomes  should  not  be 
open  to  inspection  by  the  public,  a  ruling  which  laid 
the  tax  open  to  all  sorts  of  evasions,  and  subsequently 
induced  its  reversal  by  the  commissioner, 
i  Act  of  July  1,  1862. 


92  THE  INTERNAL   REVENUE  SYSTEM. 

These  rates  remained  in  force  for  two  years,  when, 
in  response  to  the  recommendations  of  the  commissioner,1 
and  the  absorbing  demand  for  revenues,  the  comprehen- 
sive measure  of  June  30,  1864,  was  passed^  by  which  the 
duties  were  considerably  increased,  and  the  rates  ren- 
dered more  strongly  progressive.  By  this  Act  incomes 
between  $600  and  $5,000  were  taxed  at  the  rate  of  five 
per  cent,  those  from  $5,000  to  $10,000  at  seven  and  a 
half  per  cent,  while  all  incomes  in  excess  of  the  latter 
sum  were  rendered  dutiable  at  the  uniform  rate  of  ten 
per  cent.  The  Act  further  provided  that  any  revenues 
derived  from  United  States  securities  should  be  included 
in  estimating  incomes  under  the  section,  and  that  any 
net  profits  realized  from  sales  of  land  were  to  be  re- 
turned as  income,  while  any  losses  incurred  in  the  same 
way  were  to  be  deducted.  In  a  like  manner  the  house- 
holder was  permitted  to  deduct  the  annual  rental  value 
of  his  homestead,  whether  occupied  as  tenant  from 
another,  or  held  in  his  own  right.  The  measure  speci- 
fied Avith  great  precision  the  methods  for  the  computa- 
tion of  annual  gains,  and  required  the  assessor  to  secure 
from  each  taxable  an  itemized  account  of  his  revenue 
for  the  preceding  year.  In  the  case  of  the  farmer  the 
requirement  was  extremely  burdensome ;  for  it  demanded 
a  minute  return  of  all  "  incomes  and  gains  derived  from 
the  increased  value  of  live  stock,  whether  sold  or  on 
hand,  and  the  amount  of  sugar,  wool,  butter,  cheese, 
pork,  beef,  mutton,  or  other  meats,  hay,  grain,  or  other 
productions  of  the  estate  of  such  person  sold."  Such 
demands  were  somewhat  onerous  upon  the  citizen  in- 
clined to  make  an  honest  return ;  while,  to  those  aiming 
1  Report  on  Finances,  1863,  p.  70. 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.     93 

to  evade  payment,  the  privilege  of  deducting  house- 
rent,  wages,  interest  upon  incumbrances,  and  expendi- 
tures for  repairs,  opened  an  avenue  for  evasion  and 
fraudulent  return ;  and  it  occasions  no  surprise  that, 
as  a  result,  the  tax  was  unpopular,  the  returns  incom- 
plete, and  the  burdens  unequally  distributed.  This 
measure  had  scarcely  received  the  signature  of  the 
President,  when  Congress,  by  joint  resolution,1  imposed 
a  special  income  tax  of  five  per  cent  upon  all  incomes  in 
excess  of  $600,  which  was  collected  in  addition  to  the 
regular  income  duty  of  that  year.  It  was  assessed  but 
once,  in  October,  1864,  the  war  closing  early  in  the  year 
following,  and  produced  $29,381,862,  a  striking  com- 
mentary on  the  improvement  in  the  method  of  assess- 
ment, as  well  as  an  indication  of  the  loyalty  and 
patriotism  of  the  people. 

The  classifications  of  the  law  of  1864  remained  in 
force  for  but  one  assessment,  when  they  were  again  re- 
duced to  two,2  and  all  incomes  in  excess  of  $5,000  were 
rendered  dutiable  at  ten  per  cent,  all  below  that  sum 
and  in  excess  of  $600  being  taxable  at  the  old  rate  of 
five  per  cent. 

The  war  closed  almost  immediately  after  this  latter 
modification  had  been  made,  and  the  imperative  necessi- 
ties of  the  Treasury  were  in  part  relieved.  Naturally, 
agitation  for  the  immediate  repeal  of  the  tax  at  once 
commenced  ;  but  Congress  wisely  preferred  first  to  re- 
lieve those  subjects  most  oppressed  by  the  excise.  In- 
dustry was  shackled,  and  the  laws  of  trade  unsettled,  by 
the  duplication  of  taxes  induced  by  the  general  excise. 
The  income  tax,  on  the  other  hand,  fell  mainly  upon 
i  July  1,  18G4.  2  Act  of  March  3,  1865. 


94  THE  INTERNAL   REVENUE  SYSTEM. 

accumulated  wealth,  and,  in  the  mind  of  the  Revenue 
Commission,  would  "  probably  be  sustained  with  less 
detriment  to  the  country  than  any  other  form  of  taxa- 
ation,  the  excise  upon  spirituous  and  fermented  liquors, 
and  tobacco,  possibly  excepted."  *  It  is  this  impotency 
of  the  income  tax  to  affect  prices  and  industry,  as  well 
as  its  non-interference  with  the  free  employment  of 
capital,  which  renders  it  such  a  fit  emergency  tax.  It 
is,  in  addition,  elastic,  and  capable  of  immediate  and 
indefinite  expansion  in  time  of  temporary  necessity. 

Unfortunately,  the  report  of  the  Eevenue  Commission, 
so  replete  and  satisfactory  in  other  respects,  offers  but 
little  information  in  regard  to  the  operations  of  this 
tax.  Its  temporary  retention  was,  however,  advocated ; 
but  the  element  of  progressivity  was  deemed  to  be  an 
unjust  discrimination,  and  a  "  tax  on  the  results  of 
successful  industry  and  business  enterprise."  The  Com- 
mission therefore  recommended  the  repeal  of  this  dis- 
crimination, and  the  imposition  of  a  uniform  rate  of  five 
per  cent  on  all  incomes  in  excess  of  $1,000,  which  sum 
was  held  to  be  no  more  than  the  equivalent  of  $600  at 
the  time  when  the  tax  was  first  imposed,  inasmuch  as 
the  advance  in  the  prices  of  all  commodities  had  greatly 
enhanced  the  cost  of  living.  The  report  further  advised 
that  deductions  for  house-rent  be  no  longer  allowed,  or, 
if  permitted,  that  they  be  limited  to  $300 ;  for  such 
excessive  rentals  had  been  permitted  by  the  assessors 
in  the  past,  that  in  Xew  York  alone  the  estimated  losses 
to  the  revenue  by  reason  of  this  permission  exceeded 
$2,000,000  a  year.3 

1  House  Executive  Documents  No.  34,  Thirty-ninth  Congress, 
p.  27.  *  Ibid.,  p.  28. 


DIRECT  TAXES  OX  PERSOXS  AXD  PROPERTY.     95 

Congress  acceded  to  the  report  in  so  far  as  it  related 
to  the  raising  of  the  exemption  to  $1,000,  with  a  uni- 
form rate  of  five  per  cent  upon  all  incomes  in  excess  of 
that  sum,  while  the  proviso  was  added  thereto  that  the 
tax  should  expire  in  1870. l  This  latter  provision  wras 
not  observed,  however ;  for  Congress,  fearing  a  defi- 
ciency, later  extended  its  operations  for  two  years  more, 
but  with  the  exemption  increased  to  $2,000. 2  It  is  of 
interest  to  note  that  under  these  later  provisions  the  tax 
became  even  more  unpopular  than  it  had  been  before, 
as  it  assumed  in  the  eyes  of  the  payer  the  form  of  a 
compulsory  tribute  imposed  upon  large  wTealth.  In 
addition  to  the  exemption  of  $2,000,  as  well  as  all  taxes 
paid,  deductions  were  also  permitted,  as  in  earlier  meas- 
ures, for  all  losses  "  actually  sustained  from  fires,  floods, 
shipwrecks,  or  that  occurred  in  trade  ;  the  amount  of 
interest  paid  during  the  year,  the  amount  paid  for 
rent  or  labor  to  cultivate  land,"  as  well  as  any  expen- 
diture incurred  in  repairs  other  than  those  for  improve- 
ment. 

The  effect  of  these  provisions  was  greatly  to  impair 
the  productivity  of  the  tax.  Thus,  in  1871,  the  num- 
ber of  taxables  returned  was  but  74,775,  while  in 
the  following  year  (the  last  of  its  operation)  they  fell 
off  still  further  to  72,949 ;  while  the  receipts  for 
the  same  years  were  $14,434,949  and  $8,146,686  re- 
spectively. 

The  income  tax  has  always  been  unpopular  with  cer- 
tain classes.  It  is  indicted  as  invading  the  sanctity  of 
the  most  private  affairs,  as  being  inseparable  from  in- 
quisitorial scrutiny  into  business  relations,  and  an  insuf- 
i  Act  of  March  2,  1807.  2  Act  of  July  14, 1870. 


96  THE  INTERNAL   REVENUE  SYSTEM. 

ferable  intrusion  into  those  affairs  of  the  individual 
which  are  in  a  sense  sacred,  and  which  in  the  past  had 
been  exempted  from  the  visits  of  the  tax-gatherer.  It 
is  further  alleged  that  a  tax  which  offers  such  oppor- 
tunities for  evasion  is  a  charge  upon  honesty  and  patri- 
otism, and  a  premium  upon  perjury. 

Unquestionably,  the  tax  was  exposed  to  widespread 
evasion,  especially  in  the  large  cities.  Such  complete 
confidence  was  reposed  in  the  individual  that  evasion 
was  an  easy  matter ;  and  the  instructions  of  the  commis- 
sioner, early  in  1S63,  that  the  returns  should  be  open 
for  inspection  only  to  officers  of  the  revenues,  simply  fa- 
cilitated it.  By  a  later  ruling,  however,  all  returns  were 
thrown  open  to  the  public,  "  in  order,"  as  the  commis- 
sioner said,  "  that  the  amplest  opportunity  may  be  given 
for  the  detection  of  any  fraudulent  returns  that  may 
have  been  made."  1  That  this  ruling  had  its  expected 
result  may  be  questioned;  for  it  induced  other  evils, 
which  probably  offset  any  stimulus  to  honest  returns. 

In  order  to  facilitate  the  collection  of  the  tax,  exten- 
sive use  was  made  of  the  principle  of  stoppage  at  the 
source.  Corporations  of  a  certain  kind  announcing 
dividends  were  directed  to  deduct  the  tax,  and  pay  the 
same  to  the  collector  before  the  distribution  of  earnings 
to  the  stockholders.  By  this  means  a  large  portion  of 
the  tax  was  collected  before  the  income  reached  the 
hands  of  the  individual,  while  fraudulent  returns  were 
checked,  and  the  necessity  of  supervision  reduced  to  a 
minimum.  It  was  estimated  that  the  cost  of  returning 
this  portion  of  the  tax  did  not  exceed  one-fifth  of  one 

1  Boutwell's  "  Direct  and  Excise  Taxation  in  the  United  States," 
p.  259. 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.     97 

per  cent,  a  fact  which  led  the  commissioner  to  recom- 
mend that  the  system  of  stoppage  be  extended  to  all 
corporations  for  profit  declaring  dividends,1  as  later 
provided  in  the  measure  of  1894.  How  efficient  this 
method  was  will  appear  from  the  fact  that  in  1865, 
when  the  total  receipts  from  incomes  was  $32,050,017, 
nearly  forty  per  cent,  or  $11,346,018,  was  turned  into 
the  Treasury  from  the  earnings  of  banks,  canal,  rail- 
road, insurance,  and  turnpike  companies,  and  Federal 
employees.2 

But  despite  the  fact  that  the  income  tax  was  unpopu- 
lar, and  the  returns  depleted  by  fraud  and  evasion,  it 
proved  one  of  the  most  satisfactory,  from  a  purely  fiscal 
point  of  view,  of  the  many  expedients  hit  upon  by 
Congress. 

In  1865  it  produced  as  much  as  spirits,  both  malt  and 
distilled,  and  tobacco  ;  while  in  the  year  following  it 
returned  nearly  forty  per  cent  more  than  these  com- 
bined sources.  In  the  former  year  over  fifteen  per  cent 
of  the  entire  internal  revenue  receipts  was  derived  from 
this  source,  in  1866  over  twenty-three  per  cent,  and  in 
1867  over  twenty-four  and  a  half  per  cent. 

As  indicative  of  the  distribution  of  wealth,  as  well 
as  the  variations  of  income,  it  is  interesting  to  note 
the  receipts  from  the  various  classes  of  payers  during 
the  years  from  1863  to  1872.  With  the  collections 
from  corporations  and  Federal  employees,  they  are  as 
follows :  — 


1  Report  on  Finances,  18G3,  p.  73. 

2  The  tax  upon  the  incomes  of  Federal  officials  was  collected  by 
the  disbursing  officers,  who  withheld  the  duty  in  paying  the  salaries 
of  employees. 


98 


THE  INTERNAL   REVENUE  SYSTEM. 


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DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.     91) 


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100  THE  INTERNAL   REVENUE  SYSTEM. 

In  explanation  of  the  preceding  table,  it  is  necessary 
to  remember  that  collections  for  the  fiscal  years  of  1863 
and  18G4  from  personal  incomes  are  under  Acts  of  Aug. 
5,  1861,  and  July  1, 1862,  at  rates  given  in  the  text  (col- 
lections under  measure  of  1861  are  not  reported  sepa- 
rately) ;  those  of  1865  are  in  part  under  Act  of  1862  and 
part  under  Act  of  1864  (the  triplicate  division  of  the 
Act  of  June  30,  1864,  not  being  made  in  the  returns). 
The  collections  of  1866  and  1867  are  under  Act  of  1865  ; 
those  of  1868,  1869,  and  1870  under  Act  of  1867 ;  and 
those  from  1871  to  1873  inclusive  are  under  Act  of  1870. 
The  collections  from  corporations  up  to  1864  are  at  three 
per  cent ;  afterwards  at  five  per  cent. 

As  will  be  seen,  the  increased  rates  imposed  in  1864 
did  not  begin  to  yield  largely  until  two  years  after  their 
imposition,  a  fact  not  traceable  to  the  slowness  with 
which  the  duties  became  operative  so  much  as  to  the 
fact  that  the  returns  given  are  for  fiscal  instead  of  calen- 
dar years.  The  new  rates  were  not  assessed  until  May, 
1865,  and  returns  were  not  required  until  early  in  the 
fiscal  year  1866.  This  also  accounts  for  the  fact  that 
the  measure  of  1861  did  not  begin  to  yield  until  1863. 

It  is  further  of  interest  to  note  that  the  receipts  at 
three  and  five  per  cent  under  the  law  of  1862  bear 
approximately  the  same  relation  to  each  other  as  do 
the  receipts  under  the  later  Act  of  1864.  This  same 
parity  is  observable  when  we  examine  the  returns  of 
taxables.  In  1866,  from  one  hundred  and  eighty-five  of 
the  two  hundred  and  forty  collection  districts,  190,189 
returns  were  made  of  incomes  over  $600  and  under 
$1,000;  162,513  of  more  than  $1,000  and  less  than 
$5,000 ;  while  31,009  persons  acknowledged  incomes  in 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.    101 

excess  of  the  latter  amount.  Presuming  this  ratio  to 
hold  for  the  remaining  fifty-five  collection  districts,  the 
number  of  taxables  returned  for  the  year  1866  could  not 
have  been  more  than  500,000  at  the  utmost.  At  this 
time  the  population  of  the  country  approximated  thirty- 
six  millions,  and  estimating  one  taxable  for  every  five 
persons,  it  appears  that  but  one  person  in  every  four- 
teen and  one-half  taxables,  or  in  seventy-two  persons, 
received  an  income  in  excess  of  $600,  a  showing  in- 
dicative of  a  comparatively  high  standard  of  living,  as 
well  as  of  a  close  collection  of  the  tax.  In  a  like  man- 
ner, as  indicative  of  the  territorial  distribution  of  the 
duty,  it  may  be  cited  that  from  one  collection  district 
in  New  York  the  income  tax  receipts  for  the  fiscal 
year  1867  were  $5,496,233,  while  the  total  revenues 
collected  for  the  same  year  from  this  source  in  the 
eleven  States  of  Virginia,  Texas,  Tennessee,  South 
Carolina,  North  Carolina,  Mississippi,  Louisiana,  Ala- 
bama, Georgia,  Arkansas,  and  Florida,  were  less  than 
one-half  that  amount.1  As  confirming  this  territorial 
inequality,  it  is  interesting  to  note  that  in  1869  Mas- 
sachusetts, New  York,  New  Jersey,  Pennsylvania,  Ohio, 
Illinois,  and  California,  although  possessing  but  forty  per 
cent  of  the  total  wealth  and  population  of  the  country, 
paid  upwards  of  three-fourths  of  the  entire  tax  collected. 
Following  the  Act  of  March  2,  1867,  which  increased 
the  exemption  allowed  to  $1,000,  the  number  of  tax- 

1  The  collections  on  account  of  the  income  tax  for  the  fiscal  year 
1867  from  these  States  was  as  follows:  from  Florida,  $14,197;  Arkan- 
sas, $34,980.13 ;  Mississippi,  $00,740 ;  South  Carolina,  $62,208.48 ;  North 
Carolina,  $62,450.58 ;  Virginia,  $204,623.41;  Texas,  $155.:  140.80;  Ten- 
nessee, $396,327.86 ;  Louisiana,  $586,282.42;  Georgia,  $320,552.07 ;  Ala- 
bama, $404,036.77;  Total,  $2,301,739. 


102  THE  INTERNAL   REVENUE  SYSTEM. 

ables  returned  manifested  a  considerable  falling  off, 
while  the  receipts  were  diminished  by  about  one-half. 
During  the  four  years  of  the  operation  of  the  revised 
rate,  the  average  number  of  taxables  returned  was 
267,210,  of  which  number  nearly  sixty  per  cent  paid 
taxes  in  excess  of  twenty  dollars. 

As  a  crowning  enactment  of  this  long  period  of  ex- 
perimentation, the  limit  of  exemption  was  increased  in 
1870  to  $2,000,  with  the  avowed  intention  of  relieving 
all  save  comparatively  large  incomes  from  its  operation. 
At  the  same  time  the  rate  was  reduced  to  two  and  a 
half  per  cent,  at  which  point  it  remained  until  1872, 
when  the  tax  expired  by  limitation. 

From  the  experience  of  these  years  it  is  not  possible 
to  draw  any  absolute  conclusions  as  to  the  availability 
of  the  income  tax  for  Federal  purposes,  inasmuch  as  the 
measure  of  a  tax  lies  largely  in  its  fitness  to  conditions 
and  the  times ;  and  the  defects  of  the  duty  during  this 
period  were  largely  administrative  in  character,  traceable 
to  the  inefficiency  of  its  administration.  The  entire  ser- 
vice was ,  experimental,  the  men  untrained,  and  the  ma- 
chinery imperfect ;  and,  had  the  tax  been  never  so  well 
suited  to  our  political  and  social  conditions,  its  produc- 
tivity would  have  suffered  greatly  from  this  cause. 

III.     TAXES    ON    CORPORATIONS. 

A.  The  Gross  Receipts  Tax  on  Railroads,  Advertisements, 
Bridges,  Canals,  Express  Companies,  Ferries,  Lotteries, 
Ships,  Barges,  Stages,  Steamboats,  Telegraph  mid  Insurance 
Companies,  and  Museums,  Operas,  Circuses,  etc. 

With  the  possible  exception  of  the  taxes  on  distilled 
and  fermented  liquors,  there  are  probably  no  subjects 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.     103 

better  fitted  for  taxation  by  the  Federal  government  than 
certain  corporations  whose  business  is  of  an  interstate 
character.  Unsuited  as  they  are  for  State  and  local 
taxation,  from  the  difficulty  of  localizing  the  situs  of 
their  property,  as  well  as  from  the  character  of  their 
business,  and  circumscribed  as  the  local  divisions  are  by 
judicial  decisions  which  deny  to  them  the  power  to  tax 
more  than  a  limited  portion  of  their  earnings,  such  cor- 
porations are  eminently  fitted  for  taxation  by  the  nation 
at  large,  to  which  none  of  these  restrictions  apply.1 

The  plan  of  taxing  according  to  gross  receipts  was  by 
no  means  new  at  the  outbreak  of  the  war,  and  legislation 
but  followed  the  approved  practices  of  the  States  in  se- 
lecting such  a  method  of  reaching  this  form  of  property. 

Aside  from  receipts  from  advertisements,  the  gross 
receipts  tax  was  imposed  upon  a  limited  number  of 
corporations  by  the  measure  of  1862.  By  its  provis- 
ions, railroads,  toll  bridges,  and  steamboats  were  ren- 
dered dutiable  at  the  rate  of  three  per  cent  upon  the 
gross  receipts  from  the  transportation  of  passengers, 
while  ferry-boats  and  railroads  propelled  by  other  means 
than  steam  paid  one  and  a  half  per  cent.  Returns  and 
payments  of  the  tax  were  required  to  be  made  monthly, 
under  oath,  by  the  proper  official,  and  in  case  of  neglect 
or  refusal  the  collector  was  authorized  to  inspect  the 
books  of  the  company  and  make  up  his  returns  from 
that  source,  and  add  thereto  a  penalty  of  five  per  cent ; 
while  any  attempt  to  evade  payment  of  the  duty  ren- 
dered the  corporation  liable  to  a  penalty  of  $1,000.     It 

1  For  an  exhaustive  account  of  the  devices  adopted  hy  the  States 
in  their  efforts  to  tax  this  class  <>f  property,  see  Professor  E.  R.  A. 
Seligman's  "  The  Corporation  Tax,"  in  his  "  Essays  on  Taxation." 


104  THE  INTERNAL    REVENUE   SYSTEM. 

was  further  provided  that  the  companies  should  have 
the  right  to  add  the  tax  to  the  fare  of  the  passengers. 
Eeceipts  from  advertisements  were  dutiable  at  the  rate 
of  three  per  cent. 

At  the  same  time  a  system  of  stoppage,  in  aid  of  the 
collection  of  the  income  tax,  was  provided,  by  which 
the  income  derived  from  bonds  of  railroads,  or  arising 
from  dividends  on  stock,  should  be  collected  from  the 
railroad  itself,  instead  of  from  the  individual  directly, 
who  Avas  permitted  subsequently  to  deduct  the  same  in 
making  up  his  individual  return  of  income. 

The  receipts  from  the  gross  receipts  tax  were  at  first 
insignificant,  being  but  $1,661,273  in  1863,  and  twice 
that  sum  in  1864.  But  the  manifold  advantages  of  the 
tax  becoming  apparent,  it  was  extended  by  later  enact- 
ments to  canal-boats  and  stage-coaches,1  to  apply  to  all 
receipts,  whether  from  passengers  or  freight,  with  the 
rate  reduced  upon  all  transmission  companies  to  two 
and  one-half  per  cent,  while  the  duty  remained  unal- 
tered on  toll-roads,  ferries,  and  bridges.2  Express  com- 
panies were  added  to  the  list  at  three  per  cent,  as 
were  telegraph  companies  at  five  per  cent,  and  theatres, 
operas,  circuses,  and  museums  at  two  per  cent  in  addi- 
tion to  their  regular  license  charges. 

The  system  of  stoppage  in  aid  of  the  income  tax  was 
also  gradually  extended  to  canal  and  slack-water  navi- 
gation and  turnpike  companies,  as  well  as  to  banks, 
trust,   savings,   and    insurance  companies.3     The  latter 

i  Act  of  June  30,  1864. 

2  By  Act  of  March  3,  18fi3,  toll-roads  and  bridges  had  been  taxed 
at  two  per  cent,  and  ferry-boats  at  one  and  one-half  per  cent. 

3  Act  of  June  30,  1804. 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.    105 

class  of  corporations  were  assessed  upon  their  gross 
premiums,  the  rate  subsequent  to  1864  being  one  and 
a  half  per  cent. 

With  the  close  of  the  war  and  the  confusion  of  com- 
mercial and  industrial  relations  which  ensued,  it  was 
deemed  wise  to  retain  the  several  taxes  upon  corpora- 
tions, along  with  the  income,  license,  and  stamp  taxes, 
because  of  their  inability  to  affect  prices  or  industrial 
relations,  as  did  the  general  excise.  In  18GG,1  however, 
the  gross  receipts  tax  was  made  uniform  at  two  and  one- 
half  per  cent  upon  all  receipts  of  railroad,  steamboat, 
ship,  barge,  canal-boat,  or  stage-coach  companies,  toll- 
roads  and  bridges ;  telegraph  lines  were  made  dutiable 
at  the  former  rate  of  three  per  cent ;  while  any  corpora- 
tion whose  gross  receipts  did  not  exceed  $1,000  was 
wholly  exempted.2  At  this  rate  the  duty  remained  un- 
til 1870,  when  all  the  gross  receipts  taxes  were  repealed.3 

The  receipts  from  railroad  and  insurance  companies, 
from  the  gross  receipts  tax,  as  well  as  the  taxes  collected 
on  account  of  the  income  duty,  are  shown  in  tabular 
form  on  the  following  page. 

The  duty  on  dividends  and  interest  payments  was  three 
per  cent  up  to  1864,  afterwards  five  per  cent.  The 
tax  was  thereafter  imposed  on  all  profits  carried  to  the 
account  of  any  fund  or  used  in  construction.  Collec- 
tions from  this  source,  i.e.,  profits,  etc.,  are  included  in 
dividends,  and  were  made  on  behalf  of  the  income  tax. 


i  Act  of  July  13. 

2  By  Act  of  March  2, 1867,  all  gross  receipts  taxes  were  reduced  to 
two  and  one-half  per  cent,  while  those  on  advertisements  and  toll- 
roads  were  repealed. 

3  By  Act  of  July  14. 


106 


THE  INTERNAL   REVENUE   SYSTEM. 


Receipts  from  Railroads  on  behalf  of  Income  and  Gross 
Receipts  Taxes. 


1863. 

1864. 

1865. 

1866. 

1867. 

Duty  on  dividends  . 

i 

338,533 

927,393 

S 
2,470,817 

1 

2,205,804 

s 

j   3,379,262 

Int.  paid  on  bonds   . 

253,999 

596,859 

847,684 

1,255,916 

Gross  receipts      .    . 

1,106,817 

2,127,249 

5,917,293 

7.614,448 

4,128,255 

1868. 

1869. 

1870. 

1871. 

TOTAL. 

Duty  on  dividends  . 

8 

2,630,174 

3 
2,831,140 

S 
2,898,802 

S 
1,121,439 

1 

1  21,416,738 

Int.  paid  on  bonds  . 

1,259,155 

1,503,846 

1,869,369 

974,345 

»  9,987,844 

Gross  receipts      .     . 

3,134,337 

3,255,487 

3,732.209 

1,637,911 

32,654,008 

1  Tbe  totals  of  collections  from  dividends  and  interest  paid  on  bonds  are 
not  exact,  as  tbey  also  include  some  collections  for  1872  and  1873  which  are 
not  given  in  detail. 

Receipts  from  Insurance  Companies  on  behalf  of  Income  and 
Gross  Receipts  Taxes. 


1863. 

1864. 

1865. 

1866. 

1867. 

Dividends    and  Addi- 
tions     to      Capital 
Stock  i 

Premiums  and  Assess- 
ments   

$ 

225,485 

321,002 

s 

445,366 
523,582 

s 

704,658 
961,503 

9 

767,231 

1,169,722 

| 

563,473 

1,326,014 

1868. 

1869. 

1870. 

1871. 

TOTAL. 

Dividends   and  Addi- 
tions     to      Capital 

Premiums  and  Assess- 

f 

605,489 

1 ,288,745 

f 

S47,6CS 

1,323,330 

1 

926,519 

1,324,454 

s 

243,205 
445,547 

5,6S9,070 
8,683,902 

Tbese  collections  are  on  behalf  <>f  income  tax. 


The  rate  upon  dividends  was  the  same  as  upon  rail- 
roads. That  upon  premiums  was  one  per  cent  to  July 
1,  1864,  payable  quarterly,  subsequently  one  and  a  half 
per  cent,  payable  monthly. 


DIRECT  TAXES  ON  PER  SOX  S  AXD  PROPERTY.     10\ 


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108  THE  INTERNAL   REVENUE  SYSTEM. 

The  tax  was  one  of  the  most  effective  and  successful 
sources  of  revenue  devised,  and  produced  during  these 
years  nearly  fifty-five  millions  of  dollars. 

B.    Banks,    Trust   Companies,  Savings  Institutions. 

In  the  taxation  of  this  kind  of  corporations,  a  mixed 
system  prevailed.  At  first1  no  distinction  was  made 
between  banks  and  insurance  companies,  and  the  tax 
was  assessed  at  three  per  cent  upon  dividends  and  ad- 
ditions to  the  surplus  or  contingent  funds.  By  later 
provisions,  however,  a  distinction  was  made,  and  net 
profits  were  discarded  as  a  measure  of  ability;  and  a 
mixed  method,  such  as  had  been  in  operation  in  some 
of  the  States,  was  introduced.  In  1864  the  license  duty 
was  increased  to  $  100  upon  all  banks  having  a  capital 
stock  of  $50,000,  with  an  increase  of  $2  for  each  addi- 
tional $1,000  increase  of  capital  stock  :  while,  in  addition, 
there  was  added  a  duty  of  one  twenty-fourth  of  one  per 
cent  each  month  upon  the  average  amount  of  deposits 
for  the  preceding  month  ;  a  tax  of  like  amount  upon  the 
average  amount  of  capital  employed  ;  and  a  duty  of  one- 
twelfth  of  one  per  cent  each  month  upon  the  average 
amount  of  circulation  issued  by  the  bank,  provided  it 
did  not  exceed  ninety  per  cent  of  the  capital  of  the 
company,  in  which  case  one-sixth  of  one  per  cent  upon 
any  increase  of  circulation  beyond  the  latter  amount  was 
imposed.  In  the  case  of  banks  having  branch  establish- 
ments, each  branch  was  assessed  separately ;  but  these 
duties  did  not  apply  to  any  of  the  banks  organized 
under  the  new  national  banking  Act,  which  made  their 

i  By  Act  of  Julyl,18G2. 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.     109 


returns  to  the  comptroller,  nor  to  any  savings  bank  con- 
ducted upon  the  mutual  plan.  The  receipts  from  banks, 
trust  companies,  and  savings  institutions,  were  as  fol- 
lows :  — 

Receipts  from  Banks,  Trust  and  Savings  Companies,  for  the 
Fiscal  Years :  — 


Dividends  and  Additions  to  Sur- 
plus       

Circulation 


Deposits . 
Capital    . 


7GG,G0G 


1,577,011 
2,056,996 

780,723 


1865. 


3,9S7,210| 

1,993,342 

2,040,933 

902,835 


1866. 


4,186,023 
990,328 

2,099,635 
374,074 


1867. 

1868. 

1869. 

$ 
3,774,975 

3,624,774 

3,769,185 

208,276 

26,901 

14,110 

1,355,395 

1,438,512 

1,734,417 

476,867 

399,562 

445,071 

1870. 


Dividends  and  Additions  to  Sur- 
plus      

Circulation 


Deposits . 
Capital    . 


3,573,272 

13,615 

2,177,576 

827,087 


The  duty  on  dividends  was  three  per  cent  to  June  30, 
1864,  after  which  date  it  was  five  per  cent.  This  is 
more  properly  a  collection  on  account  of  the  income  tax. 
Capital  was  first  rendered  dutiable  in  1864.  The  rapid 
diminution  in  the  receipts  from  circulation  after  1865  is 
due  to  the  conversion  of  State  banks  into  national  ones. 

The  returns  from  national  banks  are  not  included  in 
the  above,  but  were  collected  by  the  Treasurer  of  the 
United  States.  In  1867  the  comptroller  made  a  careful 
statement  of  the  taxes  on  national  banks  for  the  year 
1866,  from  which  it  appears  that  they  paid  during  that 
year  over  sixteen  millions  of  dollars  in  United  States 
and  State  taxes,  as  follows  :  — 


110  THE  INTERNAL   REVENUE  SYSTEM. 

Taxes  paid  by  National  Banks  in  1866. 

To  the  United  States  government $8,069,937 

To  the  several  States 7,949,461 

The  amount  of  taxes  paid  to  the  several  States  was 
derived  from  specific  returns  of  about  fourteen  hundred 
banks,  the  minimum  rate  in  each  State  being  calculated 
for   those   banks   which    made    no   returns. 

The  taxes  were  payable  semi-annually,  upon  out- 
standing circulation,  deposits,  and  capital  not  invested 
in  United  States  bonds. 

The  amount  of  taxes  collected  by  the  Treasurer  from 
Jan.  1,  1864,  to  Jan.  1,  1872,  from  these  sources,  was  as 
follows :  — 

On  circulation 819,177,734.54 

On  deposits 18,611,945.72 

On  capital 2,453,025.17 

The  taxes  on  corporations  were  collected  directly  by 
the  internal  revenue  office  at  Washington ;  and  the  whole 
work,  which  was  well  done,  was  handled  by  less  than  fif- 
teen clerks,  at  an  average  annual  cost  of  about  $20,000. 

IV.     ASSESSED    TAXES,    KNOWN    AS    SCHEDULE    "A." 

The  assessed  taxes,  as  levied  during  the  war,  were 
viewed  as  duties  upon  expenditure,  and  correspond  to 
the  direct  consumption  taxes  of  the  English  system. 
Levied,  as  they  were,  mainly  upon  certain  classes  of 
luxuries,  but  little  objection  can  be  raised  to  them,  were 
it  but  possible  to  secure  a  fair  and  equitable  assessment. 
But  the  experience  of  our  States  has  demonstrated  this 
to  be  well-nigh  impossible ;  and  while  such  taxes  have 
always  been  more  or  less  popular  in  this  country,  where 
the  principle  seems  to  obtain  that  equality  in  taxation 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.     Ill 

is  only  consistent  with  universality  in  taxation,  late 
years  have  tended  to  their  elimination  from  the  tax 
schedules  of  many  States.  In  a  federal  system  such 
taxes  are  especially  objectionable ;  inasmuch  as  they 
necessitate  that  inquisitorial  penetration  into  private 
affairs  which  is  borne  only  with  impatience  in  local 
taxation,  but  which  becomes  intolerable  when  the  tax- 
gatherer  bears  Federal  credentials.  Indefinite  in  their 
productivity  and  inelastic  in  character,  they  tend  to 
extend  the  objects  of  taxation  unduly,  and  combine 
almost  all  the  defects  of  the  excise  with  those  of  the 
income  and  direct  land  tax.  As  a  rule,  they  are  being 
abandoned  by  other  countries. 

The    schedule  of   assessed   taxes   subsequent   to   the 
amendatory  law  of  18G4  was  as  follows :  — 

Billiard-tables  kept  for  private  use  or  hire    .    $10.00 
Carriages  for  private  use  or  hire,  according 

to  value,  from 1.00  to  10.00 

Pianofortes    for    private    use,    according    to 

value,  from 2.00  to    6.00 

Gold  plate  for  private  use  or  hire,  per  ounce 

troy .50 

Silver  plate  for  private  use  or  hire,  per  ounce 

troy .05 

Watches,  below  $100  in  value 1.00 

Watches,  above  $100  in  value 2.00 

Yachts  for  private  use  or  hire,  according  to 

value 5.00  to  100.00 

These  rates  differ  from  the  earlier  measures  only  in  the 
addition  of  gold  watches  and  piano-fortes  to  the  list  of  tax- 
ables,  and  in  the  fact  that  the  rates  are  somewhat  higher. 
The  same  improvement  in  the  collection  of  the  duty 
marked  in  other  taxes  is  noticeable  here ;  but,  at  the 
same  time,  there  are  none  which  show  more  strikingly 


112 


THE  INTERNAL   REVENUE  SYSTEM. 


how  far  from  universal  was  the  collection.  As  will  be 
seen  from  the  table  given  below,  the  revenues  show  a 
gratifying  increase  during  the  five  years  from  1863  to 
1867,  in  the  last  two  years  increasing  nearly  one  hun- 
dred per  cent  annually.  Of  the  increase  in  1866,  gold 
watches  produced  $426,557,  and  pianofortes  $403,572. 
The  receipts  were  as  follows ;  — 

Receipts  from  Assessed  Taxes  for  Fiscal  Years:  — 


ARTICLES. 


Billiard-tables  .... 

Carriages 

Plate  of  gold  and  silver 
Watches,  gold  .... 
Pianofortes  kept  for  use 
Yachts  kept  for  use  .    . 
Imported  spirits  .    .    . 


Total 


1863. 


§  10,730.S0 
243,704.05 
108,736.58 


2,459.50 


§365,630.93 


1864. 


S  67,999.59 
320,076.12 
130,090.65 


2,673.50 
176,038.57 


§696,878.43 


1865. 


§  67,753.70 

322,720.21 

118,113.57 

9,138.61 

7,751.82 

2,098.33 

252,690.29 


§780,  266.53 


ARTICLES. 


1866. 


1867. 


1868. 


Billiard-tables  .... 

Carriages 

Plate  of  gold  and  silver 
Watches,  gold  .... 
Pianofortes  kept  for  use 
Yachts  kept  for  use  .     . 
Imported  spirits  .    .    . 


S  17,353.05 
624,457.02 
216,574.37 
426,557.17 
403,572.27 
4,408.25 
200.00 


S  20,761.14 
183,855.58 
287,842.93 
619,062.61 

1,005,152.11 


§  23,422.12 
224,004.85 
252,563.70 
605,788.71 

27,960.60 


Total 


§1,093,122.73 


§2,116,674.37 


$1,134,339.98 


ARTICLES. 


Billiard-tables  .  . 
Carriages  .... 
Plate  of  gold  and 

silver 

Watches,  gold  .  . 
Pianofortes      kept 

for  use  .... 
Yachts     kept     for 

use.     ...... 

Imported       spirits 

Total      .    .    . 


§  22,805.92 
184,035.00 

204,733.13 
471,286.68 


10,792.73 


§893,653.46 


1870. 


J  25,775.56 
190,711.45 

198,115.89 
492,839.19 


1871. 


13,487.70 
83,005.13 


90,145.84 
190,221.78 


§907,442.09    §376,860.45 


Total. 


J    270,089.58 
2,377,170.01 

1,606,916.66 
2,814,894.75 

1,455,229.53 
11,639.58 

428,928.86 


§8,964,868.97 


DIRECT  TAXES  ON  PERSONS  AND  PROPERTY.    113 

Such  a  showing  indicates  that  time  is  a  most  essential 
element  in  an  efficient  system  of  taxation;  but,  at  the 
same  time,  it  is  difficult  to  believe  that  anything  like 
a  full  assessment  was  secured  at  any  time. 

The  assessed  taxes  were  among  the  least  defensible 
of  the  taxes  imposed  during  this  period,  the  revenues 
derived  therefrom  being  inconsiderable  in  amount,  and 
the  effect  upon  the  public  irritating  beyond  measure. 
Even  more  keenly  than  the  income  tax  did  the  public 
resent  this  invasion  into  its  private  affairs,  while  the 
ease  of  evasion  rendered  it  one  of  the  most  unequal  of 
taxes,  as  well  as  a  constant  incentive  to  dishonesty  and 
perjury.  Although  modified  to  some  extent,  it  was 
not  until  1870  that  they  were  repealed.1 

i  Act  of  July  14,  1870. 


114  THE  INTERNAL   REVENUE  SYSTEM. 


CHAPTER  V. 

TAXES    ON"   SUCCESSIONS,    ACTS   AND    TRANSFERS,    IN- 
STRUMENTS,   COMMODITIES,    AND    BUSINESSES. 

I.     DUTIES     UPON     LEGACIES     AND     DISTRIBUTIVE    SHARES 
OF    PROPERTY. 

A.   Legacy  and  Succession  Duties. 

Taxes  upon  inheritances  and  bequests,  or  death  duties 
as  they  are  termed  in  England,  may  best  be  regarded 
as  capitalized  income  taxes,  paid  once  for  all  at  the  close 
of  life  on  the  accumulated  possessions  of  the  decedent. 
These  taxes  usually  accompany  the  income  tax,  and 
have  been  so  largely  developed  in  recent  times  as  to  have 
become  a  recognized  part  of  nearly  every  well-ordered 
scheme  of  taxation.  Previous  to  the  war,  however,  they 
were  but  little  used  by  our  States,  and  then  only  as 
imposed  upon  collateral  inheritance.1  By  the  provis- 
ions of  the  early  Acts  of  Congress,  only  personalty  in 
excess  of  $1,000,  transferred  by  bequest  or  inheritance, 
was  subject  to  the  duty;  and  the  rate  was  graduated 
according  to  the  consanguinity  of  the  recipient  of  the 
estate.  By  the  later  Act  of  1864,  however,  its  provisions 
were  extended  to  real  estate,  and  the  following  rates 
were  established :  — 

1  The  tax  has  existed  in  Pennsylvania  since  1826,  and  in  Maryland 
since  1844 ;  but  since  that  time  it  has  been  incorporated  in  the  laws 
of  many  States. 


TAXES   ON  SUCCESSIONS.  115 

Legacies  or  inheritances  to  — 

Lineal  issue,  or  ancestor,  brother  or  sister1 .     .     .  1  per  cent. 

Descendant  of  brother  or  sister 2    "     " 

Uncle  or  aunt,  or  descendant  of  same      ....  4    "     " 

To  great  uncle  or  aunt,  or  descendant  of  same     .  5    "     " 

Stranger  in  blood 6    "     << 

A  minimum  deduction  of  $1,000  was  allowed  the 
representatives,  while  estates  devolving  upon  husband 
or  wife  were  entirely  exempt.  The  tax  was  a  first  lien 
upon  the  estate  of  the  decedent,  and  was  required  to 
be  paid  before  it  passed  into  the  hands  of  the  repre- 
sentatives. In  case  of  failure  to  make  return,  or  on 
evidence  of  falsity  in  the  same,  the  assessor  was  em- 
powered to  proceed  and  make  his  own  assessment,  and 
distrain  sufficient  property  to  satisfy  the  tax.  The 
rates  were  soon  recognized  as  incommensurate  with 
those  imposed  on  other  objects,  which  fact,  together 
with  the  newness  of  the  law,  as  well  as  the  ignorance 
of  the  public  and  the  assessors  with  its  application, 
rendered  it  less  productive  than  had  been  expected.  So 
incomplete,  indeed,  was  the  assessment,  that  the  Special 
Commissioner  of  the  Eevenue  estimated  that  but  a  frac- 
tion of  the  tax  was  collected ; 2  for  instead  of  producing 
$4,000,000,  as  he  estimated  that  it  should  have  done, 
it  turned  into  the  Treasury  in  1865  but  $543,000.  A 
similar  tax  was  producing  at  that  time  in  Great  Brit- 
ain over  $11,000,000.  In  New  York  alone,  where  the 
transfers  of  property  by  death  amounted  in  a  single 
year  to  $31,000,000,  it  should  have  produced,  at  the 
uniform  rate  of  one  per  cent,  $310,000,  or  two-thirds 

1  In  the  case  of  realty  the  rate  imposed  upon  the  succession  of 
brother  or  sister  was  two  per  cent. 

2  Report,  1807,  p.  40. 


116  THE  INTERNAL    REVENUE  SYSTEM. 

the  amount  collected  for  the  entire  country.  Again, 
when  it  is  considered  that  the  entire  wealth  of  the 
country  changes  hands  once  every  thirty-two  years  (as- 
suming that  period  to  be  the  lifetime  of  a  generation), 
it  is  evident  that  a  very  small  tax-rate  ought  to  be  pro- 
ductive of  a  very  large  revenue. 

Assuming  $14,830,000,000  (the  census  estimate  for 
1860)  to  be  the  wealth  of  the  country,  and  computing 
that  it  changes  hands  once  in  the  course  of  a  genera- 
tion, the  tax  should  have  produced  $4,600,000  anually 
at  the  uniform  rate  of  one  per  cent.  As  a  matter 
of  fact,  only  about  two-thirds  of  the  revenue  collected 
accrued  at  this  rate ;  so  that,  had  the  duty  been  fully 
assessed,  it  should  have  returned  to  the  Treasury  up- 
wards of  $6,000,000. 

From  1865  down  to  the  repeal  of  the  tax  in  1870,  the 
collections  steadily  increased  in  amount,  owing  to  the 
growing  familiarity  of  the  public  and  officials  with 
the  law.  In  1866  the  receipts  had  risen  to  $1,170,977. 
During  the  four  years  next  succeeding  they  steadily 
increased,  until,  in  1870,  $3,091,824  was  returned. 

The  repealing  Act  of  1870  did  not  waive  the  claim  of 
the  government  to  any  "taxes  properly  assessed  or  lia- 
ble to  be  assessed  or  accruing  under  the  provisions  of 
former  Acts ; "  and  in  1875  the  Commissioner  of  Inter- 
nal Revenue  issued  a  circular,  offering  rewards  to  any 
informers  who  would  mouse  the  probate  records,  and 
report  cases  of  unpaid  taxes.  The  effect  of  this  rul- 
ing was  to  cause  much  annoyance  to  many  innocent 
administrators,  heirs,  and  legatees  who  had  never  heard 
of  the  tax,  and  to  whom  the  duty,  to  which  was  added 
the  penalty,  was  a  great  injustice. 


TAXES   ON   SUCCESSIONS.  117 

The  receipts  from  the  tax  were  as  follows  :  — 
Receipts  from  Intestate  Succession. 


Consanguinity. 

For  Fiscal  Tears  ended 

IlNK    30,— 

1863. 

1864. 

1865. 

1866. 

Successions  — 

Lineal  issue  or  ancestor, 
Brother  or  sister,  or  de- 

$24,043.88 

$175,789.10 

8,468.35 

49,899.07 

Uncle   or    aunt,  or  de- 

1,166.75 

1,902.02 

Great  uncle  or  aunt,  or 

descendant  of  same    . 

6,272.34 

1,460.63 
17,104.06 

Total     

$39,951.32 

$246,154.88 

CONSANGUINITT. 

For  Fiscal  Years  ended  June  30,— 

1867. 

1868. 

1869. 

Successions  — 

Lineal  issue  or  ancestor, 
Brother  or  sister,  or  de- 

$455,188.55 

$910,794.70 

$852,487.82 

scendant  of  same    .    . 
Uncle   or    aunt,  or  de- 

104,381.81 

222,386.63 

182,167.38 

scendant  of  same    .    . 
Great  uncle  or  aunt,  or 

9,639.32 

20,174.14 

12,952.44 

descendant  of  same    . 
Stranger  in  blood  .    .    . 

7,780.86 
59,579.C5 

4,840.77 
140,827.36 

3,796.91 
138,351.67 

$636,570.19 

$1,305,023.60 

$1,189,756.22 

CONSANGUINITT. 

For  Fiscal 
June 

Ye  w:s  ended 
30,— 

Total. 

1870. 

1871. 

Successions  — 

Lineal  issue  or  ancestor, 
Brother  or  sister,  or  de- 

$977,068.40 

$751,176.79 

$4,146,549.24 

scendant  of  same    .    . 
Uncle    or    aunt,  or  de- 

222,196.35 

171,843.72 

961,343.31 

scendant  of  same    .    . 
Great  uncle  or  aunt,  or 

32,775.00 

16,511.66 

95,121.33 

descendant  of  same    . 
Stranger  in  blood  .    .    . 

9,754,46 
177,448.36 

1,499.28 
133,948.34 

$5 

29,132.91 
679,531.78 

$1,074,979.79 

,911,678.57 

118  TIIE  INTERNAL   REVENUE  SYSTEM. 

Receipts  from  Legacies. 


Consanguinity. 

For  Fiscal  Years  ended  June  30, — 

1863. 

1864. 

1865. 

1866. 

Legacies  to  — 
Lineal  issue  or  ancestor, 
brother  or  sister      .    . 
Descendant  of    brother 

Uncle   or  aunt,  or  de- 
scendant of  same    .    . 

Great  uncle  or  aunt,  or 
descendant  of  same    . 

Stranger  in  blood  .     .     . 

§25,869.10 

11,332.63 

634.56 

2S5.7S 
18,470.48 

§176,917.33 

37,64S.61 

12,232.63 

322.22 
84,040.23 

$298,756.48 

87,081.04 

25,840.81 

16,460.79 
78,612.73 

$642,081.67 

105,531.17 

28,993.27 

11,300.39 
136,917.47 

Total     

§56,592.61 

§311,161.02 

§506,751.85 

$924,823.97 

Consanguinity. 

For  Fiscal  Years  ended  June  30,— 

1867. 

1868. 

1869. 

Legacies  to  — 
Lineal  issue  or  ancestor, 
brother  or  sister      .    . 
Descendant  of   brother 

Uncle   or  aunt,  or   de- 
scendant of  same    .    . 

Great  uncle  or  aunt,  or 
descendant  of  same    . 

Stranger  in  blood  .    .    . 

§783,126.52 

177,394.46 

32,075.56 

15,012.71 
221,135.71 

§1,033,833.57 

172,854.33 

40,375.63 

13,506.37 
257,817.74 

§858,428.84 

142,406.46 

42,549.01 

20,6S0.03 
180,772.67 

§1,228,744.96 

$1,518,387.64 

$1,244,837.01 

Consanguinity. 

For  Fiscal  Years  ended 
Junk  30,— 

Total. 

1870. 

1871. 

Legacies  to  — 
Lineal  issue  or  ancestor, 
brother  or  sister      .    . 
Descendant  of   brother 

Uncle   or    aunt,  or   de- 
scendant of  same    .    . 

Great  uncle  or  aunt,  or 
descendant  of  same    . 

Stranger  in  blood  .     .     . 

$1,022,834.88 

232,251.13 

28,217.77 

11,907.71 
377,371.44 

§874,940.37 

216,356.56 

38,640.13 

13,366.56 
286,771.72 

§5,716,794.82 

1,182,856.39 

249,565.37 

102,842.56 
1,041,910.19 

§1,672,582.93 

$1,430,087.34 

§8,893,009.33 

TAXES   ON  SUCCESSIONS.  119 

B.    Probate,  Administration,  and  Inventory  Duties  collected 
by  Means  of  Stamps. 

In  addition  to  the  taxes  upon  legacies  and  successions 
assessed  upon  the  value  of  the  property  transferred, 
certain  other  charges  collected  by  means  of  stamps 
were  assessed  upon  the  administration  of  the  estate 
of  the  decedent.  Probably  the  first  reference  to  in- 
heritance taxes  in  the  United  States  is  to  be  found 
in  the  report  of  a  special  committee  on  finance,  which 
recommended  to  the  House  of  Representatives,  in  1794, 
the  imposition  of  graduated  stamp  duties  upon  inven- 
tories of  the  effects  of  deceased  persons,  receipts  for 
legacies  of  personal  property  according  to  the  value 
thereof,  as  well  as  upon  the  issuance  of  letters  of  ad- 
ministration, and  the  probate  of  wills.1 

Three  years  later,  among  other  duties  upon  legal  in- 
struments, there  were  levied  the  following  taxes  to  be 
collected  by  means  of  stamps  : 2  — 

Upon  receipts  for  legacies  and  shares  of  personal 
property  :  — 

Between  $  50  and  $100,  a  tax  of  $0.25 

Between  100  and     500,  a  tax  of     0.50 

For  each  additional  500,  a  tax  of     1.00 

Shares  under  $50  were  exempt,  as  were  those  of  wid- 
ows, children,  and  grandchildren. 

The  Act  continued  in  force  four  years,  and  was  re- 
pealed in  1802,  along  with  the  other  internal  taxes. 
During  the  war  of  1812  no  taxes  upon  inheritances 
were  levied,  although  Secretary  Dallas,  in  the  closing 

1  State  Papers,  Finance,  vol.  L,  p.  277.        2  Act  of  July  6,  1797. 


120  THE  INTERNAL  REVENUE  SYSTEM. 

days  of  the  struggle,  reported  a  plan  to  Congress  for 
their  imposition. 

By  the  Act  of  July  1,  1862,  the  following  stamp 
duties  were  imposed  upon  the  probate  of  wills  or  let- 
ters of  administration  :  — 

"Where  the  estate  does  not  exceed  $    2,500,  a  tax  of  $  0.50 

Where  the  estate  exceeds  $  2,500  but  not  5,000,  a  tax  of  1.00 
WThere  the  estate  exceeds  5.000  hut  not       20,000,  a  tax  of       2.00 

Where  the  estate  exceeds  20,000  but  not  50,000,  a  tax  of  5.00 
Where  the  estate  exceeds  50,000  but  not  100,000,  a  tax  of  10.00 
Where  the  estate  exceeds      100,000  but  not     150,000,  a  tax  of     20.00 

By  the  Act  of  June  30,  18G4,  the  above  duties  were 
increased  to  $1.00  on  any  estate  below  $2,000 ;  while 
for  every  $1,000,  or  fraction  thereof  in  excess  of  $2,000, 
an  additional  50  cents  was  charged.  In  addition,  all 
bonds,  receipts,  or  other  legal  documents  connected  with 
the  administration  of  an  estate,  were  also  taxable. 


II.  TAXES  UPON  LEGAL  INSTRUMENTS,  COMMERCIAL 
TRANSACTIONS,  AND  COMMODITIES,  COLLECTED  BY 
MEANS    OF    STAMPS. 

Like  the  impots  de  timbre  of  France  and  the  stamp 
taxes  of  England,  the  stamp  tax  does  not  designate 
a  separate  tax  as  such,  but  merely  denotes  the  mode 
of  collecting  taxes  upon  certain  acts,  instruments,  or 
commodities  by  means  of  stamped  government  paper. 
Modern  society  has  accepted  this  method  of  making 
collections  as  at  once  the  easiest,  and  as  offering- 
great  conveniences  for  apportioning  a  tax  according 
to  value. 

At  the  present  time,  substantially  all  internal  revenues 


TAXES   ON  LEGAL  INSTRUMENTS.  121 

are  collected  by  this  means,  although  during  the  war  the 
use  of  the  term  was  restricted  to  the  duties  upon  acts, 
instruments,  and  the  transfers  of  property,  as  well  as 
to  the  method  employed  in  taxing  certain  kinds  of 
commodities,  as  patent  medicines,  cosmetics,  drugs,  and 
playing-cards.  Since  1868  the  duty  upon  tobacco,  malt 
liquors,  distilled  spirits,  and  licenses  has  been  collected 
in  this  Avay,  as  the  use  of  stamps  has  not  only  simpli- 
fied the  administration,  but  has  been  found  to  deter 
evasion  by  rendering  it  easily  discoverable. 

The  experience  of  the  government  during  the  period 
under  consideration  seems  to  indicate  that  these  taxes 
were  among  the  most  satisfactory  hit  upon  by  Congress 
in  its  search  for  sources  of  revenue ;  for  they  were  not 
only  productive  from  the  start,  producing  ten  per  cent 
of  the  revenues  in  18G3,  but  were  found  to  be  very 
elastic,  and  susceptible  of  indefinite  increase  as  business 
became  adjusted  to  their  use.  Inexpensive  to  collect, 
they  bore  mainly  upon  those  whose  transactions  were 
frequent,  and,  in  the  case  of  legal  and  commercial  trans- 
actions, were  a  payment  for  a  privilege  enjoyed.  In- 
dustry was  not  greatly  disturbed  by  them,  nor  were 
prices ;  for  they  were  specific  in  amount  and  easily  com- 
puted. They  were  imposed  upon  written  or  printed 
instruments,  or  the  commodity  itself,  and  derive  their 
name  from  the  fact  that  the  stamp  bore  upon  its  face 
the  amount  of  the  duty  paid. 

By  the  law  of  1862  these  taxes  were  imposed  upon 
a  great  variety  of  articles  and  proceedings,  which  may 
be  divided  into  three  general  classes,  as  follows :  (1) 
taxes  on  legal  instruments,  as  writs,  deeds,  contracts, 
mortgages,  conveyances,  leases,  manifests,  probates,  pow- 


122  THE  INTERNAL   REVENUE  SYSTEM. 

ers  of  attorney,  etc. ;  (2)  those  upon  commercial  pro- 
cesses, as  checks,  drafts,  and  foreign  and  inland  bills 
of  exchange,  bills  of  lading,  parcels  by  express,  bonds, 
certificates  of  stocks,  insurance  policies,  charter  parties, 
etc  ;  (3)  taxes  upon  commodities,  as  patent  medicines, 
perfumer}',  cosmetics,  playing-cards,  and  other  products 
which  could  be  more  easily  assessed  by  this  means  than 
by  the  general  ad  valorem  or  specific  taxes.  In  the 
majority  of  cases,  the  tax  was  essentially  proportional, 
and  was  assessed  either  according  to  the  amount  of  the 
consideration  specified  in  the  instrument,  or  to  the 
value  of  the  commodity  itself.  For  example,  the  fee 
for  recording  a  mortgage  ranged  from  fifty  cents  on  a 
consideration  of  $500,  to  $15  on  $20,000,  while  the 
duties  upon  commercial  processes  and  manufactured 
products  conformed  to  a,  rough  ad  valorem  rate.  For- 
eign bills  of  exchange  were  taxed  at  a  lower  rate  than 
inland  bills,  although  both  were  proportional ;  while 
telegraph  despatches,  express  packages,  etc.,  were  taxed 
in  a  like  manner.  The  rate  upon  patent  medicines, 
cosmetics,  playing-cards,  perfumery,  etc.,  was  four  per 
cent.  To  insure  observance  of  the  tax,  penalties  were 
imposed  for  failure  to  affix  a  stamp ;  while  an  even 
more  efficient  check  to  evasion  lay  in  the  invalidity  of 
the  instrument  itself  and  its  inadmissibility  as  evidence. 
In  order  to  prevent  the  re-use  of  stamps,  the  person 
affixing  the  same  wrote  across  the  face  his  initials  and 
the  date  of  use.  Under  certain  regulations  persons 
were  permitted  to  prepare  and  use  their  own  stamps, 
and  were  allowed  a  commission  thereon. 

Later  laws  modified  these  provisions  but  little.     Eates 
were  made  more  uniformly  proportional,  while  a  number 


TAXES   ON  COMMERCIAL    TRANSACTIONS.      123 

of  new  articles,  notably  matches  and  photographs,  were 
included  in  the  schedule.  As  a  rule,  the  taxes  were  so 
inconsiderable  in  amount  as  to  be  but  little  objection- 
able ;  but  in  the  case  of  mortgages  they  were  rather 
oppressive.  Declared  payable  by_the  person  in  whose 
favor  the  instrument  was  drawn,  the  tax  amounted  to 
a  one  mill  charge,  repeated  every  time  the  mortgage 
was  renewed ;  and,  inasmuch  as  such  instruments  are 
frequently  made  under  the  pressure  of  distress,  a  tax  at 
such  a  time  is  most  inconvenient,  and  may  cause  some 
hardship.  Discounts  were  also  granted  large  purchas- 
ers of  stamps  of  five  per  cent  upon  quantities  between 
fifty  and  five  hundred  dollars,  and  of  ten  per  cent  upon 
quantities  in  excess  of  that  sura.  In  this  provision  lay 
a  great  injustice,  which  later  tended  to  the  stimulation 
of  combination  in  production  ;  since  small  manufacturers 
were  frequently  unable  either  to  advance  the  tax  or  to 
take  advantage  of  the  discounts,  which  wrere  sufficiently 
large  to  be  of  themselves  a  remunerative  profit  to  the 
large  purchaser.  As  a  consequence,  they  were  fre- 
quently forced  to  the  wall,  or  into  combination  with 
other  producers,  as  was  the  case  of  the  match  monop- 
oly, which  for  years  controlled  that  industry  in  this 
country,  and  which  is  said  to  have  been  rendered  possi- 
ble, and  later  fostered,  by  this  sort  of  special  legisla- 
tion. Yet  another  objection  may  be  urged  against  these 
taxes  because  of  their  interference  with  industry;  for 
while  it  cannot  be  asserted  that  the  tax  was  in  many 
instances  a  serious  check  to  trade  or  commercial  trans- 
actions, still  it  was  an  irritant,  insisting,  as  it  did.  upon 
the  affixing  of  a  stamp  to  every  check  or  receipt,  and 
upon  every  bill  of  exchange  a  graduated  tax.     To  this 


124  THE  INTERNAL   REVENUE  SYSTEM. 

extent  it  interfered  with  credit  transactions,  and  ren- 
dered trade  less  spontaneous  and  free  than  it  otherwise 
would  have  been. 

When  interfering  with  the  minutiae  of  trade  in  this 
way,  such  taxes  may  well  be  the  cause  of  complaint; 
in  so  far  as  they  are  applied  only  to  transfers  of  consid- 
erable amount  by  deed  or  other  instrument,  but  little 
objection  can  be  made  to  them,  inasmuch  as  they  then 
assume  the  form  of  a  fee,  and  are  a  partial  concession  to 
that  school  of  advocates  who  view  taxes  as  a  payment 
for  services  rendered. 

The  stamp  tax  was  from  the  start  productive,  easy  of 
assessment,  and  very  elastic.  From  its  inauguration  in 
1863,  down  to  the  partial  repeal  subsequent  to  the  close 
of  the  war,  the  receipts  steadily  increased  in  amount, 
owing  to  the  growing  familiarity  of  the  public  with  the 
law,  until  in  1867  it  produced  $16,094,718,  which  sum 
the  secretary  estimated  could  be  further  increased  to 
$20,000,000  without  material  alteration  in  the  law.1 
All  things  considered,  it  was  one  of  the  most  satisfac- 
tory experiments  of  Congress,  but  from  the  administra- 
tive point  of  view  it  had  possibly  most  to  commend 
it.  Upon  this  point  the  commissioner,  writing  in  1863, 
says:  "Among  the  most  satisfactory  branches  of  our 
excise  law  must  be  reckoned  that  which  levies  stamp 
duties  on  documents  and  evidences.  This  tax  is  of  all 
others  the  most  cheaply  and  easily  collected,  and  most 
cheerfully  borne;  and,  in  the  future  development  of 
our  system,  it  is  the  one  from  which  most  advantage 
may  yet  be  expected  from  a  gradual  and  judicious 
extension."  - 

i  Report  on  Finances,  1869,  p.  12.  2  Ibid.,  1863,  p.  70. 


TAXES   ON   COMMERCIAL    TRANSACTIONS.      125 

The  receipts  for  the  several  years  of  its  duration  were 
as  follows  :  — 


1863     . 

.       $4,140,175 

1868    . 

.    $14,852,252 

1864     . 

5,894,945 

1869     . 

.       16,420,710 

1865     . 

.       11,162,392 

1870    . 

.       16,544,043 

1866 

15,044,373 

1871     . 

.       15,342,739 

1867     . 

.       10,094,718 

1872    . 

.       16,177,320 

These  receipts  include  collections  from  acts  and  in- 
struments, as  well  as  commodities.  During  the  years 
of  1863  and  1864,  the  measure  was  by  no  means  uni- 
versally observed ;  and  the  later  marked  increase  in  re- 
ceipts can  only  be  traced  to  the  growing  familiarity  of 
the  public  with  the  provisions  of  the  law,  as  the  increase 
in  rates  by  the  Acts  of  1864  and  1865  was  not  material. 
In  1864  a  duty  on  matches,  which  lingered  long  after 
the  war  as  a  memorial,  was  imposed,  and  produced  up- 
wards of  a  million  of  dollars  during  the  first  year  of  its 
operation. 

From  the  returns,  it  appears  that  six-sevenths  of  the 
entire  consumption  consisted  of  two-cent  bank-check 
and  receipt  stamps,  the  several  stamps  upon  proprietary 
articles,  and  the  duty  on  matches ;  while  one-third  of 
the  total  receipts  in  1865  was  derived  from  bank- 
checks,  receipts,  and  matches,  two  and  one  half  millions 
being  derived  from  the  two  former  sources  alone.  Large 
as  the  return  from  matches  appears,  it  was  considerably 
depleted  by  the  large  quantity  produced  and  stored  in 
anticipation  of  the  tax. 

From  1865,  down  to  the  complete  repeal  of  the  tax, 
the  observance  of  the  tax  improved,  and  the  law  was  all 
but  universally  observed. 


126  THE  INTERNAL   REVENUE  SYSTEM. 


III.  THE  TAX  ON  SALES  AT  AUCTION,  OF  APOTHECARIES, 
BUTCHERS,  BROKERS,  CONFECTIONERS,  DEALERS, 
PLUMBERS,    AND    MANUFACTURERS. 

A  tax  was  first  imposed  upon  property  sold  at  auction 
at  the  instance  of  Hamilton,  in  1794,  who  probably  bor- 
rowed the  idea  from  a  similar  tax  imposed  in  England  by 
Lord  North  in  1771  for  the  conduct  of  the  war  against 
the  American  Colonies.  This  tax  continued  in  existence 
until  1800 ;  and  while  the  receipts  therefrom  continued 
to  increase  in  importance,  they  never  amounted  to  more 
than  one-half  the  yield  originally  estimated.  The  tax 
was  revived  under  the  emergencies  of  the  war  of  1812, 
and  remained  in  force  for  several  years.  Evasions  of 
the  tax  were  notorious.  Assessments  were  voluntary, 
and  the  collection  of  the  tax  depended  wholly  upon  the 
conscience  of  the  auctioneer,  to  whom  was  intrusted 
the  duty  of  collecting  it. 

The  tax  was  revived  in  18G2,1  and  was  levied  at  the 
rate  of  one-tenth  of  one  per  cent  on  the  gross  amount 
of  receipts  from  sales  at  auction  of  real  estate,  goods, 
chattels,  or  securities.  Keturns  were  required  monthly, 
under  oath ;  but  all  sales  under  judicial  proceedings  were 
declared  exempt.  Two  years  later  2  the  rate  upon  auc- 
tion sales  was  increased  to  one-fourth  of  one  per  cent, 
and  was  extended  to  brokers  and  bankers  at  the  rate  of 
one-eighth  of  one  per  cent  on  sales  of  merchandise, 
produce,  or  goods ;  and  of  one-twentieth  of  one  per  cent 
on  the  par  value  of  all  sales  of  stocks  and  bonds,  gold 
and  silyer   bullion,   foreign   exchange,  and   promissory 

i  Act  of  July  1 .  -  Act  of  June  30, 1864. 


TAXES   ON  COMMERCIAL    TRANSACTIONS.      127 

notes.  These  taxes  were  in  addition  to  the  regular 
license  fees. 

From  evidence  taken  by  the  Revenue  Commission,  it 
appeared  that  the  rates  upon  brokers'  sales  were  heavier 
than  the  business  would  bear,  and  widespread  evasion 
was  the  result.1  In  conformity  with  its  suggestions  the 
rates  on  receipts  from  such  sales  were  reduced  to  one 
cent  on  every  hundred  dollars  of  the  amount  of  such 
sales,  while  an  improvement  in  the  method  of  assess- 
ment was  introduced  in  the  requirement  that  upon 
every  contract  or  sale  there  should  be  affixed  a  stamp  in 
value  equal  to  the  amount  of  the  duty.  By  the  same 
measure  the  rate  on  sales  at  auction  was  reduced  to  one- 
tenth  of  one  per  cent.2  The  result  of  these  changes  was 
to  reduce  receipts  from  the  latter  source  by  about  one- 
half  ;  from  the  former  sixty  per  cent. 

Although  the  taxes  on  sales  were  acknowledged  to  be 
notoriously  evaded,  constant  pressure  was  brought  to 
bear  to  have  the  method  extended  to  all  sales  of  goods 
and  merchandise,  as  a  substitute  for  the  general  excise 
upon  manufactures  and  products.  In  the  early  days  of 
the  war  the  Chamber  of  Commerce  of  New  York  advo- 
cated such  a  measure,  while  the  manufacturers  of  the 
country  generally  favored  it.  In  1864  the  commissioner 
advocated  a  moderate  resort  to  the  tax  on  sales  as  a 
means  for  meeting  a  deficiency  in  the  revenues,  although 
he  admitted  that  it  was  unsuited  as  a  fixed  portion  of 
the  system  without  important  change.  With  it  extended 
so  as  to  include  all  sales  of  merchandise,  at  the  rate  of 
one-half  of  one  per  cent,  levied  the  same  as  the  taxes 

1  Report  of  Revenue  Commission,  p.  33. 

2  Act  of  July  13,  18(36. 


128  THE  INTERNAL   REVENUE  SYSTEM. 

upon  brokers  and  wholesale  dealers,  he  estimated  that 
$55,000,000  could  be  collected,  a  conclusion  reached  in 
the  following  manner  :  Prom  the  most  reliable  statistics 
available,  it  appeared  that  the  value  of  all  the  products 
of  the  country  for  the  year  1863  was  $3,800,000,000. 
Assuming  that,  on  an  average,  they  would  be  sold  four 
times  before  reaching  market,  and  that  three-fourths  of 
the  annual  production  was  exchanged,  it  appeared  that 
the  annual  sales  of  manufactures  and  products  aggre- 
gated $11,000,000,000,  upon  which  a  tax  of  one-half 
of  one  per  cent  would  yield  $55,000,000.  The  advan- 
tages of  such  a  tax  were  thought  to  be  numerous.  It 
would  be  immediately  productive  of  a  considerable  sum, 
and  would  cause  but  little  disturbance  to  industry.  Pay- 
able out  of  mone}"  received,  and  at  the  time  of  receiving 
it,  it  would  be  easily  borne.  The  seller  would  add  the 
tax  to  the  price,  and  anticipate  the  demands  of  the  gov- 
ernment ;  and  the  purchaser,  if  he  bought  to  sell  again, 
would  reimburse  himself  from  the  consumer.  The  tax 
also  commended  itself  to  the  commissioner  by  the 
facility  of  its  assessment  and  collection.1 

But  the  advantages  claimed  for  the  tax  by  the  com- 
missioner were,  in  reality,  the  main  objections  to  it. 
Experience  demonstrated  the  difficulty  of  securing  any- 
thing like  a  fair  return  from  those  classes  of  business 
already  subject  to  it,  and  the  history  of  similar  experi- 
mentation in  our  States  but  confirms  it.  If  confined  to 
manufacturers  and  producers,  and  levied  but  once,  it 
would  be  no  more  objectionable  than  an  ad  valorem 
rate  upon  production ;  but  when  repeated  at  every  op- 
eration and  transaction  from  the  time  an  article  first 
1  Report  on  Finances,  1864,  p.  60. 


TAXES    ON   COMMERCIAL    TRANSACTIONS.      129 

entered  the  market  to  the  time  of  its  final  consumption,  it 
becomes  not  unlike  a  barrier  to  all  trade,  checking  that 
freedom  of  exchange  so  essential  to  large  industrial  life, 
and  requiring  in  its  assessment  a  multitude  of  officials 
and  the  most  scrutinizing  inquisition  of  business  affairs. 
It  would,  moreover,  be  a  breeding-school  for  perjury, 
and  open  the  door  for  evasion  on  every  hand.  Such  a 
tax  can  only  be  collected  when  limited  to  a  few  taxables, 
and  even  then  should  only  be  imposed  as  a  last  resort. 
Happily,  the  changes  urged  by  the  manufacturers  at  the 
suggestion  of  the  commissioner  were  not  made,  although 
the  application  of  the  tax  was  considerably  extended. 
In  1867  it  was  provided  that  apothecaries,  butchers, 
confectioners,  plumbers,  and  gas-fitters,  whose  annual 
sales  exceeded  $25,000,  should  pay  one  dollar  for  every 
$1,000  of  sales  in  excess  of  said  amount,  in  addition  to 
the  special  license  tax  ;  while  in  18G8  certain  classes  of 
manufacturers,  whose  products  were  not  otherwise  taxed, 
were  assessed  at  the  rate  of  $2.00  per  $1,000  on  sales  in 
excess  of  $5,000.  These  duties,  like  those  on  auctions, 
were  self-assessed ;  yet  they  yielded  considerable  reve- 
nues; the  duty  upon  dealers  producing  $4,002,655  in  1868, 
and  on  manufacturers  $3,863,113  in  1870. 

The  last  assessment  of  these  taxes  Avas  made  in  1871, 
and  the  receipts  therefrom  during  the  nine  years  of  its 
operation  were  as  shown  on  the  two  following  pages. 

IV.       SPECIAL    OR   LICENSE    TAXES    UPON    OCCUPATIONS 
AND    GAINFUL    PURSUITS. 

In  the  taxation  of  business  corporations,  occupations, 
and  gainful  pursuits,  federal  legislation  followed  the 
methods  in  vogue  in  the  majority  of  the  States  of  assess- 


130 


THE  INTERNAL   REVENUE  SYSTEM. 


Receipts  from  Sales. 


Occupations  and  Transactions. 

Foe  Fiscal  Years  ending  June  30— 

1863. 

1864. 

1865. 

s 

s 

141,231.58 

410,175.92 

596,474.24 

2,202,792.92 

432,343.23 

420,457.23 

64,003.87 

Brokers'  — 

Cattle 

Sales  of  stocks,  bonds,  etc.    .    .    . 
Sales  of  foreign  exchange      .    .    . 
Sales  of  gold  and  silver     .... 

Dealers',  in  liquors,  on  sales  of  other 

Plumbers'  and  gas-fitters' 

Total   

64,003.87 

141,231.58 

4,062,243.54 

Occupations  and  Transactions. 

For  Fiscal  Years  endh 

g  June  30  — 

1866. 

1867. 

1868. 

s 

•s 

240,248.03 
203.56 

07,674.23 
415,169.97 

(  006,599.22 
2,369,464.70 

1 

1,489.79 

186,727.50 

5,796.71 

110,858.96 
286,438.4G 

231.33 

67.76 

4,002,655.99 

1,642.54 

503,251.35 

Brokers'  — 

Cattle 

Sales  of  stocks,  bonds,  etc.    .     .    . 
Sales  of  foreign  exchange     .    .     . 
Sales  of  gold  and  silver     .... 

870,080.00 
1,429,829.77 

152,417.56 
1,046,704.23 

Dealers',  in  liquors,  on  sales  of  other 

4,002,282.91 

3,999,360.31 

4,595,909.04 

TAXES   ON   COMMERCIAL    TRANSACTIONS.      131 


Receipts  from  Sales  (continued). 


Occupations  and  Transactions. 


Apothecaries' 

Auction 

Butchers' 

Brokers'  — 

Cattle 

Commercial 

Sales  of  stocks,  bonds,  etc.   .    .    . 

Sales  of  foreign  exchange     ,    .    . 

Sales  of  gold  and  silver     .... 

Confectioners' 

Dealers' 

Dealers',  in  liquors,  on  sales  of  other 

merchandise 

Manufacturers' 

Plumbers'  and  gas-fitters' 

Total   


For  Fiscal  Years  ending  June  30  — 


1,940.16 
175,078.52 
10,822.60 

120,718.20 
301,579.03 


2,366.39 
4,081,696.19 

9,055.51 

3,501,962.66 

1,619.77 


8,206,839.03 


1870. 


4,094.46 
160,884.43 
11,200.62 

131,803.76 
339,784.16 


2,196.70 
4,023,100.05 

299,575.97 

3,863,113.05 

1,641.77 


8,837,394.97 


812.52 

49,421.83 

2,649.76 

49,709.96 
123,430.59 


329.48 
1,264,566.19 

87,438.09 

2,070,910.18 

373.48 


3,049,642.08 


inent  by  a  specific  lump  sum,  instead  of  upon  the  net 
earnings,  rental  paid,  or  gross  sales.  This  plan,  which 
has  been  discarded  long  since  by  the  majority  of  Euro- 
pean countries,  has  the  evident  advantage  of  simplicity 
and  ease  of  assessment ;  but  in  this  simplicity  there 
inheres  so  much  that  is  arbitrary  and  unjust,  that  it  is 
doubtful  if  there  is  to  be  found  a  tax  more  unfair  to 
mercantile  classes  than  this.1  In  evidence  of  this  state- 
ment, it  is  only  necessary  to  indicate  the  incidence  of 
such  a  tax ;  for,  instead  of  its  being  a  duty  proportional 
to  the  amount  of  sales,  and  thus  susceptible  of  diffusion 


1  Cf.  "  Taxation  in  American  States  and  Cities,"  p.  2fifi,  in  which 
Dr.  Ely  indicts  the  tax  as  "  a  most  vicious  one  from  every  point  of 
■\  lew," 


132  THE  INTERNAL   REVENUE  SYSTEM. 

among  the  consumers,  it  is  in  effect  a  fixed  and  arbitrary- 
requisition,  imposed  as  a  condition  precedent  to  the 
privilege  of  doing  business.  By  such  a  plan  the  large 
producer  or  merchant  pays  the  same  duty  as  his  neigh- 
bor selling  one-half  or  one-third  the  amount  of  goods, 
and  is  thus  able  to  distribute  the  amount  over  a  larger 
surface,  or  to  assume  the  tax  altogether,  and  crush  out 
the  less  fortunate  competitor.1  Such  at  least  is  the  ten- 
dency of  a  tax  assessed  by  such  methods.  That  its  in- 
justice was  not  a  source  of  complaint  at  this  time  is  not 
due  to  the  principles  of  assessment  employed,  but  rather 
to  the  fact  that  the  rates  of  duty  were  comparatively 
low,  and  an  inconsiderable  burden  upon  even  the  small- 
est dealer.  In  fact,  it  was  one  of  the  most  popular 
of  the  taxes,  judging  from  the  evidence  of  the  Special 
Commissioner  of  Eevenue,  who,  writing  in  1867,  said  : 
"  It  should  be  clearly  borne  in  mind  that  all  our  revenue 
experience  during  the  last  five  years  has  conclusively 
shown,  that,  with  the  exception  of  stamps,  there  is  no 
class  of  taxes  which  are  paid  so  readily  and  promptly ; 
are  collected  with  so  little  trouble  and-  expense  by  the 
government  officials,  and  impede  to  so  small  a  degree 
the  industry  and  development  of  the  country  as  the  so- 
called  license  taxes."2  In  a  like  manner  Mr.  Morrill 
viewed  them  as  the  least  offensive  of  the  excise  taxes, 
the  only  possible  exception  to  them  being  the  "  novelty  " 
of  imposing  a  tax  upon  any  lawful  occupation ;  but  even 
this  objection  vanished,  he  said,  when  it  is  considered 
that  a  license  is  not  so  much  a  permit  for  carrying  on 

i  See  "Shifting  and  Incidence  of  Taxation,"  p.  168,  by  Professor 
E.  R.  A.  Seligman. 

2  Report  of  Special  Commissioner  of  Revenue,  1867,  \>.  4J. 


TAXES   ON  COMMERCIAL    TRANSACTIONS.      133 

business,  as  it  is  a  recognition  of  the  trade  and  a  desig- 
nation of  the  premises  in  which  the  industry  is  to  be 
transacted.1 

With  such  indorsement,  it  is  not  surprising  that  the 
system  was  very  diffuse.  At  the  time  of  its  greatest 
extension  all  classes  of  corporations  and  persons  carry- 
ing on  trade  were  taxed,  while  persons  conducting  dif- 
ferent pursuits  in  the  same  place,  or  the  same  pursuit 
in  different  places,  were  taxed  upon  each  establishment 
separately. 

By  the  provisions  of  the  law  any  person  or  corpora- 
tion carrying  on  business  was  required  to  register,  and 
to  furnish  to  the  assessor  any  information  requisite  to 
the  affixing  of  the  tax.  In  the  majority  of  cases  this 
was  a  simple  matter,  as  the  rate  was  uniform  upon  all 
persons  in  that  trade.  The  prevailing  rate  of  duty  was 
$10,  imposed  upon  professional  men,  retail  dealers  gen- 
erally, and  brokers.  Banks  paid  a  license  of  $100 ;  dis- 
tillers, maltsters,  brokers,  and  wholesale  dealers,  of  $50  ; 
hotels  from  $5  to  $200,  according  to  the  rental  value  of 
the  premises  occupied.2  Later  amendments  aimed  to 
render  the  duties  roughly  proportional,  although  no  at- 
tempt was  made  to  levy  an  exact  percentage  tax  on 
sales,  as  was  frequently  proposed  in  Congress.  Thus 
banks,  in  addition  to  a  stamp-tax  of  $100,  were  as- 
sessed $2.00  on  each  $1,000  of  their  capital  stock  in 
excess  of  $50,000.  Wholesale  dealers,  pawnbrokers, 
peddlers,  and  others  also  paid  in  proportion  to  annual 
sales. 

From   an  administrative  point  of  view,   and  in  the 

1  Congressional  Globe,  1802,  p.  1195- 

2  Act  of  July  1,  18G4. 


134  THE  INTERNAL   REVENUE  SYSTEM. 

light  of  results  attained,  the  tax  had  much  to  commend 
it,  for  none  was  easier  of  assessment,  and  in  none  was 
evasion  more  difficult.  Moreover,  the  revenues  were 
considerable  and  rapidly  increased  in  amount,  the  bulk 
of  the  receipts  being  returned  from  bankers,  brokers, 
wholesale  dealers,  hotels,  liquor  dealers,  and  manufac- 
turers. In  1866  the  total  receipts  from  all  classes 
were  $18,015,743,  of  which  amount  $12,596,059  was 
collected  from  these  six  sources,  while  the  thousands 
of  retail  dealers,  professional  men,  peddlers,  agents,  etc., 
returned  less  than  one-half  that  amount. 

The  total  receipts   from  this  source  during  the  years 
from  1863  to  1870  were  as  follows  :  — 


1863 

.     .     $  6,824,178 

1867 

.     .    $  18,103,615 

1864     . 

.     .         7,145,388 

1868     . 

.     .       15,966,313 

1865     . 

.     .       12,598,681 

1869     . 

.     .       16,420,710 

1866     . 

.     .       18,015,743 

1870     . 

.     .       16,544,043 

The  marked  advance  in  receipts  in  1865  and  1866 
was  due  to  the  increased  number  of  persons  subject 
to  the  charge  under  the  Act  of  1864,  to  the  advance 
of  the  duty  upon  several  kinds  of  business,  and  the  re- 
assessment of  wholesale  dealers.  Moreover,  by  1866 
the  tax  had  been  extended  to  the  greater  portion  of 
the  South.  At  the  termination  of  the  war,  it  was  pro- 
posed that  the  license  taxes  be  continued,  and  extended 
as  much  as  possible,  in  order  that  the  general  excise 
upon  manufacturers  and  products  might  be  more  read- 
ily relinquished.  This  suggestion  was  followed  in  some 
instances ;  and  the  system  was  retained  up  to  1871,  when 
the  last  assessment  was  made. 

As  indicative  of  the  relative  productivity  of  different 


TAXES   ON   COMMERCIAL    TRANSACTIONS.      135 

occupations,  the  following  table  compiled  for  the  fiscal 
years  1865,  1866,  and  1867  is  of  interest. 


Receipts  from  Special  Taxes  for  Fiscal  Years :  — 


1865. 


1866. 


1867. 


Apothecaries    .... 

Assayers 

Auctioneers      .... 

Bankers 

Brewers 

Brokers  of  various  sorts 
Claim  agents  .... 
Dealers,  — 

Retail 

Wholesale    .... 

Retail  liquor    .    .    . 

Wholesale  liquor 
Distillers,  — 

Coal-oil,  etc.     .    .    . 

Spirituous  liquors     . 

Apples,  grapes      .    . 

Hotels 

Insurance  agents      .     . 

Lawyers 

Manufacturers      .    .    . 

Peddlers 

Physicians  and  surgeons 
Rectifiers 


§32,872.43 
10,883.08 
80,515.18 

846,086.58 
77,747.00 

5S1.450.2S 
50,782.29 

1,G06,77S.53 

3,513,104.76 

2,205,866.38 

400,692.91 

16,024.8S 

46,661.22 

13,236.35 

415,279.05 

21,009.88 

190,377.25 

635,115.51 

459,298.60 

302,847.30 

48,781.52 


§43,712.86 

12,889.19 

89,724.42 

1,262,649.05 

105,412.23 

673,260.30 

70,637.39 

1,949,017.04 

5,428,344.86 

2,807,225.59 

801,531.32 

17,350.12 

81,295.06 

20,239.31 

580,021.56 

104,866.83 

264,836.75 

1,043,030.78 

079,013.63 

425,596.66 

61,300.91 


$55,447.42 

12,211.24 

98,0S4.86 

1,433,715.79 

238,155.14 

598,854.94 

84,627.49 

2,047,S00.77 

3,SS0,281.13 

2,960,683.73 

982,134.94 

21,809.32 
174,445.71 

57,332.15 
663,656.32 
148,647.85 
357,648.41 
1,296,487.27 
708,113.28 
549,308.64 

80,470.06 


136  THE  INTERNAL   REVENUE  SYSTEM. 


CHAPTER  VI. 

INDIRECT  TAXES  UPON  CONSUMPTION. 

I.     DISTILLED    SPIRITS. 

The  well-nigh  universal  experience  of  foreign  states, 
the  more  recent  history  of  our  own  excise,  as  well  as  the 
demands  of  social,  economic,  and  fiscal  considerations, 
unite  in  admitting  distilled  spirits  to  be  a  most  proper 
object  for  taxation.  First  imposed  in  England  by 
Charles  II.,  taxes  on  spirits  have  since  become  one 
of  the  most  considerable  sources  of  revenue  in  nearly 
every  civilized  State.  At  the  present  time  nearly  all 
the  German  States,  Bussia,  France,  Great  Britain,  Italy, 
Austria,  Spain,  Belgium,  The  Netherlands,  Turkey,  Den- 
mark, and  Portugal  tax  this  article  in  some  form  or 
other,1  while  in  the  United  States  the  internal  taxes 
alone  on  whiskey  produce  nearly  one-third  of  the  entire 
revenue  from  the  customs  and  inland  duties.2 

Saving  the  tentative  efforts  of  Hamilton,  and  the 
later  "  temporary  war  taxes  "  of  1814  and  1815,  the 
distiller  had  been  relieved  from  the  visits  of  the  tax- 
gatherer  in  this  country  from  the  time  of  the  adop- 
tion  of  the  Constitution  down  to  the  Civil  War,  and 

1  Vide  "  Finanz  Archiv,  1887,  Die  Brantweinsteuer,"  Dr.  J.  Wolf, 
p.  320,  in  which  the  author  gives  the  historical  development  of  the 
tax,  as  well  as  the  existing  systems  in  various  countries. 

2  In  1894  the  total  receipts  from  the  customs  and  the  excise  were 
$278,929,762,  the  internal  tax  on  whiskey  producing  $85,259,252  of 
this  amount. 


INDIRECT   TAXES   UPON  CONSUMPTION.     137 

the  industry  grew  in  importance,  freed  from  all  re- 
strictions, until  the  production  of  whiskey  was  one 
of  the  chief  industries  of  the  nation,  and  the  still, 
like  the  cider-press  of  a  later  day,  became  an  almost 
necessary  appendage  to  every  farm.  So  universal,  in 
fact,  was  the  consumption  of  whiskey,  that  in  1860  it 
was  computed  by  the  census  returns  that  over  ninety 
millions  of  gallons  were  produced  annually  in  the 
United  States,  of  which  no  more  than  three  millions 
were  for  foreign  export ;  while  the  cost  of  production 
was  so  low,  that  the  ruling  price  for  the  five  years 
preceding  the  war  was  but  twenty-four  cents'  per  gal- 
lon. It  is  by  no  means  to  be  inferred  that  all  of  this 
product  was  for  personal  consumption.1  In  the  prep- 
aration of  many  patent  medicines,  it  was  utilized  as 
the  stock  or  body  of  the  article ;  while  so  important 
was  its  use  in  the  production  of  a  certain  burning 
fluid  that  it  has  been  estimated  that  in  1860  over 
twenty-five  million  gallons  of  alcohol  were  consumed 
in  this  way.  The  cheapness  of  the  article  made  its 
use  possible  in  a  variety  of  domestic  industries,  while 
in  the  preparation  of  varnishes,  imitation  wines,  per- 
fumery, hair  tonics,  etc.,  it  was  a  prime  ingredient. 

One  of  the  reasons  why  such  commodities  as  dis- 
tilled spirits,  tobacco,  and  malt  liquors  find  such  favor 
in  the  eyes  of  financiers  is  what  Professor  Marshall 
calls  the  "inelasticity  of  their  demand."  Consump- 
tion does  not  vary  with  price,  it  is  said,  as  it  does  in 

1  In  18C>5  the  Revenue  Commission  estimated  that  the  amount  of 
spirits  required  to  supply  the  consumption  of  the  country  for  drink- 
ing purposes  was  thirty-eight  million  gallons,  while  from  three  to  six 
million  gallons  were  required  for  industrial  purposes. 


138  THE  INTERNAL   REVENUE  SYSTEM. 

other  commodities;  for  experience  has  shown  that  the 
demand  remains  about  the  same,  no  matter  what  the 
cost  of  production.  In  the  case  of  other  articles,  a 
substitute  usually  presents  itself,  which  more  or  less 
completely  satisfies  the  want,  while  not  infrequently 
the  increase  in  the  price  effectually  checks  the  demand. 
Not  so  in  the  luxuries  under  discussion,  for  as  yet  no 
substitute  has  been  found  for  intoxicants  or  other 
harmful  narcotics.1  This  being  assumed  as  true,  the 
only  problem  which  confronts  the  financier  is  an  ad- 
ministrative one,  —  namely,  the  character  and  amount 
of  the  duty  which  from  a  fiscal  point  of  view  will 
prove  the  most  efficient.  In  seeking  an  answer  to 
this  question,  the  period  now  under  consideration  fur- 
nishes one  of  the  most  instructive  and  interesting 
chapters  in  all  fiscal  history. 

The  Act  of  1862,  which  was  in  great  measure  experi- 
mental, imposed  a  low  rate  upon  spirits,  it  being  but 
twenty  cents  per  gallon,  equivalent  to  nearly  one  hundred 
per  cent  ad  valorem.  The  duty  was  obviously  insufficient. 
At  this  time  Great  Britain  was  collecting  a  tax  of  ten 
shillings  per  gallon,  from  which  nearly  fifty  millions 
of  dollars  was  annually  derived,  or  twenty  per  cent  of 
the  entire  inland  revenue  of  the  kingdom,  a  sum  equal 
to  seventy  per  cent  of  the  revenue  of  the  United  States 
from  all  sources.  So  heavy  a  rate  as  this,  the  commis- 
sioner felt,  could  hardly  be  collected  in  this  country, 
owing  to  the  wide  dispersion  of  the  population,  and  the 

1  Such  is  a  principle  which  has  frequently  been  advanced  in  re- 
gard to  such  articles ;  hut  our  own  experience,  as  will  he  shown  later, 
seems  to  indicate  that  a  considerable  modification  of  the  principle 
must  be  made. 


INDIRECT   TAXES    UPON   CONSUMPTION.     139 

undeveloped  condition  of  the  revenue  service.  He,  how- 
ever, suggested  an  increase  in  the  rate  to  sixty  cents  per 
gallon,  at  which  point  he  thought  the  revenues  would  he 
more  productive  than  at  any  other.1  These  recommen- 
dations were  approved  by  Congress,  March  7, 1864,  when 
the  rate  was  increased  as  suggested  by  the  commissioner. 
By  the  provisions  of  these  two  Acts,  the  duty  was  pay- 
able by  the  owner  or  agent  of  the  still  where  the  article 
was  produced,  after  inspection  by  a  government  official, 
who  placed  upon  the  cask  or  package  a  record  of  the 
amount  and  proof  of  the  contents,  together  with  the 
date  of  inspection  and  the  name  of  the  inspector.  Any 
attempt  fraudulently  to  evade  payment  by  the  re-use  of 
the  package,  or  by  alteration  of  the  stamp,  was  finable 
for  each  offence  at  five  hundred  dollars. 

Inasmuch  as  spirits  are  only  marketable  after  a  cer- 
tain age,  a  system  of  credits  was  inaugurated,  by  means 
of  which  the  product  might  be  placed  in  bonded  ware- 
houses, or  in  bond  as  it  is  termed,  for  a  certain  period  of 
years,  whence  it  could  only  be  removed  on  payment  of 
the  tax.  To  insure  observance  of  the  law,  every  distiller 
was  compelled  to  take  out  a  license,  and  give  bonds,  with 
one  or  more  approved  sureties,  conditioned  upon  the 
faithful  conduct  of  his  business.  He  was  further  re- 
quired to  enter  daily  a  record  of  the  amount  of  spirits 
distilled,  as  well  as  the  quantity  of  grain  consumed 
in  production,  and  to  render  a  verified  report  of  the 
same  to  the  collector  at  stated  intervals. 

Scarcely  had  the  new  rate  become  operative,  when 
Congress,  disregarding  the  advice  of  the  commissioner, 
set  itself  to  increasing  the  revenues  by  raising  exist- 
1  Report  on  Finances,  18G3,  p.  G4. 


140  THE  INTERNAL   REVENUE  SYSTEM. 

ing  rates  without  providing  adequate  means  for  their 
collection.  Duties  were  doubled  and  trebled,  the  tax 
being  increased  gradually  from  $1.50  per  gallon,  after 
July  1,  1864;  to  $2.00  per  gallon,  after  Feb.  1,  1865.1 

This  latter  rate  was  equivalent  to  an  ad  valorem  tax 
of  nearly  one  thousand  per  cent  of  the  original  cost 
of  the  product ;  and  the  results  were  such  as  would  be 
anticipated  from  such  an  exorbitant  duty,  and  stand 
as  a  permanent  illustration  of  the  effects  of  an  excessive 
rate  of  taxation  upon  a  manufactured  commodity,  where 
adequate  machinery  does  not  exist  for  its  enforcement. 
The  justification  of  this  increase  in  the  rate  was  partly 
sumptuary  and  social,  and  partly  fiscal.  It  was  main- 
tained that  spirits  being  a  harmful  luxury,  and  in  no 
sense  essential  to  comfort  or  sustenance,  no  injury 
would  result  from  the  imposition  of  a  heavy  tax,  even 
though  it  did  diminish  consumption.  But  the  fiscal 
needs  were  adequate  to  account  for  the  increase  in 
rates,  for  it  was  expected  that  large  revenues  would 
accrue  from  this  source.  As  a  matter  of  fact,  none 
of  these  expectations  were  verified;  while  the  altera- 
tions continually  being  made  in  the  rate  by  legisla- 
tion, together  with  the  apprehension  that  the  stock 
on  hand  Avould  be  subjected  to  the  $2.00  rate,  exer- 
cised an  unfavorable  influence  upon  production. 

It  is  further  a  matter  of  regret  that  the  full  increase 
of  the  duty  was  not  made  immediately  operative.  Ow- 
ing, however,  to  a  desire  to  avoid  all  appearance  of 
retroactive  legislation,  Congress  saw  fit  to  exempt 
bonded  stock  from  the  increase  in  rates,  which  opened 

1  Act  of  June  30,  1864.  By  amendatory  Act  of  Dec.  22,  1864,  the 
$2.00  rate  went  into  effect  Jan.  1,  1865. 


INDIRECT  TAXES   UPON  CONSUMPTION.     141 

the  door  for  an  immense  amount  of  speculation,  and 
enabled  producers  to  accumulate  stock  at  the  old  rate 
of  taxation  sufficient  to  supply  the  market  for  months 
ahead.  In  this  way  the  law  was  practically  evaded,  the 
Treasury  was  in  no  sense  benefited,  while  the  consumer 
paid  the  higher  tax  in  the  form  of  enhanced  profits 
to  the  speculator,  when  he  chose  to  place  the  supply 
upon  the  market.  So  general  was  this  speculative 
spirit,  and  to  such  an  extent  had  production  been  stim- 
ulated in  order  to  anticipate  the  increased  tax,  that 
on  the  1st  of  July,  1864,  when  the  rate  was  advanced 
from  sixty  cents  to  a  dollar  and  a  half  a  gallon,  there 
was  estimated  to  have  been  produced  and  stored  at  least 
forty  million  gallons  of  spirits,  a  quantity  sufficient 
to  supply  the  wants  of  the  country  for  at  least  a  year 
in  advance.1  Upon  this  stock  a  duty  of  twenty  and 
sixty  cents  per  gallon  had  been  paid,  which  yielded 
upwards  of  $24,000,000,  instead  of  $60,000,000,  which 
would  have  been  produced  had  the  rate  been  made  imme- 
diately operative.  The  same  inexplicable  legislation  in 
regard  to  tobacco  caused  corresponding  losses  to  the 
revenue  from  that  source. 

We  conceive  that  the  policy  to  be  pursued  in  the 
taxation  of  luxuries,  especially  where  the  sumptuary 
element  is  present,  to  be  to  assess  the  article  at  the 
highest  rate  the  commodity  will  bear,  without  encoura- 
ging evasion  and  loss  to  the  revenue  through  illicit  distil- 
lation or  production.  In  order  the  better  to  illustrate 
this  principle,  it  may  be  well  to  trace  the  results  of  this 
most  anomalous  series  of  enactments  from  1864  to  the 
changes  made  in  the  rates  shortly  subsequent  to  the 
close  of  the  war. 

1  Report  of  Revenue  Commission,  p.  G. 


142  THE  INTERNAL  REVENUE  SYSTEM. 

1.    The  Tax  Rates  and  the  Revenue. 

Contrary  to  all  expectations  and  all  known  rules  of 
calculation,  the  advance  of  the  rate  to  $1.50  and  $2.00 
per  gallon  produced  no  corresponding  increase  in  the 
revenues.  During  the  ten  months  of  the  fiscal  year 
1863,  the  tax  was  uniformly  twenty  cents  per  gallon, 
and  the  revenues  therefrom  $3,229,990,  collected  from 
16,149,954  gallons  of  spirits.  Accepting  as  accurate  the 
census  figures  on  the  production  of  the  country,  which 
placed  the  annual  output  in  1860  at  upwards  of  90,000,- 
000  of  gallons,  this  was  rather  an  unsatisfactory  show- 
ing. There  is  reason  for  believing  this  an  over-estimate, 
however ;  for  even  in  1864,  when  the  desire  to  anticipate 
the  tax  gave  a  decided  stimulus  to  production,  the  num- 
ber of  gallons  upon  which  the  tax  was  paid  was  but 
85,295,391.  The  rate  for  this  latter  fiscal  year  was 
sixty  cents  per  gallon,  although  during  the  earlier 
months  the  old  rate  reigned,  and  the  receipts  there- 
from rose  to  $28,431,797.  Inasmuch  as  the  Commis- 
sioner of  Internal  Revenue  estimated  that  one-half  this 
amount  was  the  result  of  forced  production  for  the  pur- 
pose of  anticipating  the  increased  tax,  which  went  into 
effect  July  1,  1864,  we  may  assume  that  the  normal 
annual  production  approximated  from  forty  to  forty-five 
million  gallons,  which  is  substantially  the  estimate  later 
made  by  the  Special  Commissioner  of  Revenue,  Mr. 
Wells. 

With  the  imposition  of  the  increased  rate  after  July 
1,  1864,  production  was  temporarily  suspended.  Such  a 
result  was  to  be  expected  from  the  accumulations  of  the 
article  on  hand.     But,  despite  this  fact,  the  commissioner 


INDIRECT   TAXES    UPON  CONSUMPTION.     143 

confidently  expected  to  realize  forty  million  dollars  from 
spirits  during  the  last  seven  months  of  the  fiscal  year 
1865. x  How  wide  of  the  truth  were  his  estimates  will 
be  seen  from  the  fact  that  the  actual  receipts  for  the 
entire  year  were  but  $15,995,701,  or  twenty-four  million 
less  than  had  been  expected  for  half  that  time.  For 
1866,  he  anticipated  eighty  million  dollars,  to  secure 
which  result  the  sole  thing  needful  "  to  render  it  almost 
certain  is  a  few  additional  means  for  securing  the  collec- 
tion of  the  tax  on  the  whole  product  of  the  distilleries, 
and  thus  protecting  the  revenue  against  illicit  distilla- 
tion, to  which  high  duties  afford  so  strong  a  tempta- 
tion." 2  His  sanguine  expectations  were  again  found 
to  be  illusory ;  for  despite  the  improvement  of  the 
service  during  the  eighteen  months  of  the  operation 
of  the  new  rate,  but  little  over  twenty-nine  millions 
were  turned  into  the  Treasury  in  1866 ;  while  for 
the  fiscal  year  1867  they  fell  considerably  below  this 
amount. 

This  extraordinary  rate  remained  in  force  but  one 
year  more,  when  in  response  to  the  recommendation  of 
the  Revenue  Commissioner  (and  upon  no  subject  are  his 
investigations  more  exhaustive  or  the  reasoning  which 
advocated  the  reduction  more  conclusive),  as  well  as  the 
promptings  of  justice  and  expediency,  the  duty  was 
reduced  to  fifty  cents  per  gallon,  at  which  rate  it  re- 
mained until  1872.  In  addition  to  this  specific  gallon 
tax,  there  was  added  a  so-called  capacity  tax  of  so  much 
per  barrel,  and  a  special  duty  for  the  reimbursement  of 
the  government  for  gaugers'  fees  and  storekeepers'  sala- 

1  Report  on  Finances,  1864,  p.  59.  2  Ibid. 


144  THE  INTERNAL   REVENUE  SYSTEM. 

ries  which  increased  the  per  gallon  rate  to  about  sixty- 
seven  cents.1 

The  rates  of  duty,  annual  production  of  spirits,  and 
the  receipts  therefrom,  for  the  six  years  of  the  operation 
of  these  rates,  were  as  follows  :  — 


YEAR. 

DUTY. 

PRODUCTION. 

RECEIPTS. 

1863 

80.20 

$16,149,954 

$  3,229,990 

1864 

0.20  and  §0.60 

85,295,391 

28,431,797 

1865 

1.50  and    2.00 

16,936,778 

15,995,701 

1866 

2.00 

14,599,289 

29,198,578 

1867 

" 

14,148,132 

28,296,264 

1868 

" 

6,709,546 

13,419,092 

The  results  of  this  change  were  remarkable.  Illicit 
distillation  on  a  large  scale  practically  ceased  with  the 
imposition  of  the  new  rate,  while  those  industries  and 
arts  in  which  spirits  formed  a  prominent  ingredient  ex- 
perienced an  immediate  revival.  At  the  same  time  the 
receipts  from  this  source  increased  with  equal  rapidity. 
They  rose  like  magic  from  thirteen  and  a  half  millions 
in  1868,  to  over  forty-five  millions  in  1869,  while  the 
number  of  gallons  reported  for  taxation  increased  in  an 
equal  degree.  Again,  during  the  fiscal  year  1870,  there 
was  a  further  increase  of  $10,534,864  in  the  revenue, 
or  from  $45,000,000  to  $55,606,094. 

1  Act  of  July  20,  1868.  This  Act  made  the  tax  50  cents  per  gallon, 
to  be  paid  by  stamps ;  but  there  was  imposed  on  the  distiller  by  the 
same  Act,  an  additional  tax  on  his  product  of  $4  per  barrel  of  40  proof- 
gallons,  which  made  the  tax  really  10  cents  per  gallon  additional,  or 
60  cents  per  gallon.  There  was  also  a  tax  on  the  grain-mashing  capa- 
city of  the  distillery,  and  a  further  requirement  of  reimbursement  by 
the  distiller  of  the  sums  paid  by  the  government  for  gaugers'  fees 
and  storekeepers'  salaries,  altogether  amounting  to  about  7  cents  per 
gallon  of  the  aggregate  product  of  spirits,  thus  making  the  whole  tax 
charged  upon  the  distiller  about  67  cents. 


INDIRECT  TAXES    UPON  CONSUMPTION.     145 

During  the  four  years  (1869-1872)  of  the  operation 
of  the  reduced  rate,  the  tax  was  assessed  and  collected 
upon  an  average  production  of  67,175,822  gallons, 
which  yielded  an  average  revenue  to  the  Treasury  of 
$34,000,000,  indicating  an  average  annual  per  capita 
consumption  of  1.65  gallons. 

The  results  of  this  experience  are  sufficiently  con- 
vincing to  establish  the  claims  of  a  new  canon  of  tax- 
ation, to  the  effect  that  a  tax  to  be  efficient  should  be 
moderate  in  amount  and  well  assessed,  rather  than 
so  excessive  as  to  encourage  fraud  and  stimulate  to 
evasion. 

2.  Fraud  and  Evasion. 

One  of  the  most  deplorable  phenomena  which  charac- 
terized the  period  was  the  demoralization  which  the 
attempt  to  collect  these  excessive  taxes  wrought  in  the 
public  service.  The  moral  grain  of  government  officials 
is  not,  as  a  rule,  much  above  that  of  the  general  public 
from  which  it  has  its  source,  and  especially  true  is  this 
where  public  preferment  is  a  reward  for  partisan  activity 
rather  than  of  meritorious  public  service. 

During  the  two  years  immediately  following  the  im- 
position of  the  tax  in  1862,  while  the  rate  was  moderate 
and  the  temptation  to  fraud  but  slight,  the  loss  from 
evasion  was  comparatively  unimportant ;  but  with  the 
opening  of  the  fiscal  year  1864,  and  the  growing  appre- 
ciation of  the  immensity  of  the  struggle,  and  the  probable 
fiscal  necessities  for  its  suppression,  it  became  generally 
recognized  that  an  increase  of  the  tax-rate  was  probable. 
The  prospect  of  legislative  action  in  this  direction  at 
once  stimulated  production,  in  order  that  the  tax  might 
be  anticipated ;  and  as  we  have  seen,  the  capacity  of  the 


146  THE  INTERNAL   REVENUE  SYSTEM. 

stills  was  pressed  to  the  utmost,  while  great  numbers  of 
new  establishments  sprang  up  in  all  parts  of  the  coun- 
try.1 As  a  result,  production  was  abnormally  increased, 
and  the  amount  entered  into  bond  rose  from  sixteen 
million  gallons  in  1863  to  eighty-five  millions  in  the 
following  year.  Of  this  amount  seventy  million  gallons 
was  bonded  before  the  increase  provided  by  the  law  of 
March  7,  1864,  went  into  effect,  while  from  this  time 
on  to  June  30,  when  the  duty  was  further  increased 
to  $1.50  per  gallon,  production  continued  at  an  unparal- 
leled rate. 

For  reasons  only  apparent  to  Congress,  these  increases 
in  rates  were  not  made  retroactive,  or  operative  upon 
existing  stock  in  bond  ;  but  when  the  spirits  came  to  be 
withdrawn  for  consumption  by  the  producer,  the  duty 
then  prevailing  was  added  by  him  to  the  price,  and  the 
tax,  which  had  never  been  paid,  was  exacted  from  the 
consumer.  The  profits  accruing  to  private  persons  from 
this  source  were  enormous,  and  have  been  estimated  at 
more  than  two  hundred  million  dollars. 

The  effect  of  this  excessive  stimulation  of  the  indus- 
try was  to  check  further  production  until  existing  stock 
should  be  consumed ;  and  in  the  month  succeeding  the 
imposition  of  the  new  rate,  we  find  the  amount  returned 
for  taxation  to  have  fallen  to  697,099  gallons.  More- 
over, as  soon  as  it  became  apparent  that  the  rate  was 
likely  to  be  permanent,  producers  at  once  began  to  cast 
about  for  means  of  evading  its  payment.  Such  were 
not  hard  to  find ;  and,  during  the  next  few  years  fraud 

1  According  to  the  census,  the  number  of  distilleries  in  1860  was 
1,138,  which  had  increased  in  number,  by  18G4,  to  2,415,  while  in  1868 
the  number  reported  was  4,721. 


INDIRECT   TAXES    UPON   CONSUMPTION.     147 

and  evasion  became  so  prevalent  in  the  production  and 
and  sale  of  liquors,  that  in  1868  a  House  committee  on 
retrenchment  asserted  that  hardly  an  honest  man  was 
to  be  found  in  the  business.     During  this  period  very 
little  effective  effort  was  made  to  enforce  the  law,  nor 
was  it  susceptible  of  enforcement.     Evidence  was  pro- 
duced  before    the  Kevenue    Commission  to  show  that 
large   quantities    of  spirits,   in  amounts    ranging  from 
20,000   to  80,000   gallons,   were  transported  to  market 
without  the  payment  of  the  duty,  and  without  protest  on 
the  part  of  the  officials,  or  knowledge  that  the  proceed- 
ing was  conducted  in  anything  but  a  perfectly  regular 
manner.     Distillers,  and   their  own  workmen  in   some 
instances,  were  appointed  their  own  inspectors ;  and  one 
case  came  to  the  knowledge  of  the  Commission  where 
the  official  in  charge  of  a  still  was  ignorant  of  the  use 
of  the  hydrometer.     The  looseness  with  which  the  law 
was  administered  during  these  years  is  almost  incon- 
ceivable.    Not  the  least  of  the  causes  for  this  were  the 
defective    provisions   regarding   official    oversight,    and 
lack   of   uniformity  in  inspection  and  practice    in  the 
matter  of  marking  and  branding  the  package.     Officials 
were  too  frequently  inefficient,  and  often,  if  not  fraud- 
ulently   in   connivance    with   producers,  ignorantly    so. 
Hundreds  of  illicit  stills  existed  all  over  the  country, 
especially  in  the  western  central  States,  where  one  of 
the  revenue  agents    estimated   that   four-fifths    of   the 
spirits  produced  did  not  pay  the  tax ;  while  in  the  case 
of  the  larger  stills,  the  inspectors  were  not  infrequently 
non-residents,  who   gave  but    casual  attention  to    their 
duties,  and  often  left  the   inspection  and   branding  of 
packages  to  the  distillers  themselves,  upon  whom  they 


148  THE  INTERNAL   REVENUE  SYSTEM. 

were  dependent  for  their  fees.  Illicit  stills  also  existed 
in  great  numbers  in  the  large  cities,  where  a  still  could 
be  operated  in  a  small  space  —  a  garret  or  cellar  or  any- 
where —  and  whose  daily  capacity  was  from  twenty  to 
fifty  gallons.1 

The  provisions  of  the  law  for  listing,  branding,  and 
inspection  were  further  indefinite  and  inadequate ;  while 
inspectors  and  assessors  were  not  infrequently  appointed 
at  the  dictation  of  distillers.  The  means  of  evasion 
were,  in  fact,  so  numerous  and  so  successful,  that  Con- 
gress exhausted  its  ingenuity  in  attempting  to  protect 
the  revenue,  but  all  to  no  purpose.  "  Eor  three  years," 
says  a  Congressional  committee  upon  this  subject, 
"efforts  have  been  made  to  collect  the  tax  (i.e.,  $2.00 
per  gallon)  ;  each  year  the  frauds  have  increased,  but 
not  the  revenue.  The  operators  throughout  have  pos- 
sessed more  ability  than  Congress ;  more  shrewdness 
than  the  revenue  department.  No  sooner  would  a  reg- 
ulation of  the  department  or  an  Act  of  Congress  be 
passed,  than  means  would  be  devised  to  evade  it.  The 
human  intellect  seems  far  more  inventive,  and  skill  far 
more  effective,  when  to  incentive  to  gain  is  added  the 
chance  of  providing  security  against  detection  and  pun- 
ishment." 

In  an  even  more  graphic  way  Mr.  Wells  describes  the 

1  To  correct  these  defects,  which  were  traceable  in  large  measure 
to  defective  legislation,  and  the  failure  to  provide  for  adeqate  inspec- 
tion, the  Revenue  Commission  in  1865  proposed  an  Act  for  the  consid- 
eration of  Congress  to  correct  the  same  ;  and  it  is  of  interest  to  note 
that  the  measure  as  reported  was  in  many  respects  identical  with 
-that  passed  in  the  infancy  of  the  Republic  (March  3,  1791),  which 
was  draughted  by  Alexander  Hamilton  —  a  singular  commentary  on 
his  perspicuity  and  almost  intuitive  knowledge  of  the  problems  to  be 
confronted  in  the  taxation  of  spirits. 


INDIRECT   TAXES    UPON  CONSUMPTION,     149 

phenomena  which  characterized  the  attempt  to  collect 
the  excessive  tax  on  spirits.  "  Under  the  strong  temp- 
tations of  large  and  almost  certain  gains/'  he  says, 
"men  rushed  into  schemes  for  defrauding  the  revenue 
with  the  zeal  of  enthusiasts  for  new  gold-fields ;  and  the 
ingenuity  of  the  American  people  has  never  had  more 
striking  illustrations  than  was  offered  in  their  devices 
for  evading  the  tax,  and  providing  for  security  against 
detection  and  punishment  in  so  doing.  The  parties 
concerned  in  these  transactions  also  showed  throughout 
more  ability  than  Congress  and  more  shrewdness  than 
the  revenue  department  of  the  national  treasury."  1 

So  high  was  the  rate  of  taxation  that  fear  of  detec- 
tion failed  to  deter  men  from  attempting  to  evade  it, 
while  the  profits  of  success  were  so  large  that  the  conni- 
vance of  officials  was  secured  by  admitting  them  to  a 
participation  in  the  gains.  How  universal  was  this  eva- 
sion may  be  seen  by  a  contemplation  of  the  statistics  of 
receipts  during  these  years.  The  normal  annual  con- 
sumption of  whiskey  was  upwards  of  forty  millions 
of  gallons ;  but,  for  the  three  years  immediately  sub- 
sequent to  the  imposition  of  the  increased  duty  in  1864, 
the  amount  returned  for  taxation  did  not  exceed  one- 
third  that  amount.  In  1867  it  fell  to  fourteen  millions, 
and  finally  sank,  without  apparent  reason,  in  the  follow- 
ing year  to  less  than  one-half  that  quantity.2  The  rev- 
enue manifested  a  like  tendency  to  decline,  despite  the 
most  strenuous  efforts  put  forth  to  protect  the  collec- 
tion.    In  1866  the  receipts  were  but  little  more  than 

1  Special  letter  of  D.  A.  Wells  to  Secretary  Carlisle,  July  8,  1893, 
p.  (>. 

2  The  exact  amount  on  which  the  tax  was  paid  was  6,709,546. 


150  THE  INTERNAL   REVENUE  SYSTEM. 

they  had  been  under  the  earlier  rate  of  twenty  cents, 
while  in  1868  they  dwindled  to  the  comparatively  in- 
significant sum  of  $13,419,092.  The  consequent  loss  in 
revenue  was  enormous,  and  during  these  years  could  not 
have  been  less  than  fifty  millions  of  dollars  annually ;  for 
but  three  gallons  paid  the  tax  where  five  escaped,  and 
the  average  rate  of  taxation  thereon  was  but  seventy 
cents.1 

One  of  the  necessary  results  of  this  state  of  affairs 
was  to  reduce  the  plane  of  competition  to  that  of  the 
most  unprincipled  dealers  in  the  market.  Despite  the 
enactment  of  Congress  providing  that  the  sale  of  whis- 
key for  less  than  the  amount  of  the  tax  was  to  be 
considered  prima  facie  evidence  of  fraud,  the  article 
continued  to  be  offered  in  the  market  in  unlimited 
quantities  at  less  than  two  dollars  per  gallon,2  and 
the  government  was  forced  to  acknowledge  itself  un- 
able to  protect  those  who  honestly  paid  the  tax. 

The  records  of  the  attempt  of  the  government  to 
enforce  the  collection  of  excessive  rates  of  taxation 
form  one  of  the  most  interesting  chapters  in  the  finan- 
cial history  of  the  country,  and  the  teachings  there- 
from cannot  be  better  summarized  than  in  the  words 
of  Mr.  David  A.  Wells.  Says  that  authority:  "When- 
ever a  government  imposes  a  tax  on  any  product  of 
industry  so  high  as  to  sufficiently  indemnify  and  reward 
an  illicit  or  illegal  production  of  the  same,  then  such 

1  The  loss  from  evasion  and  fraud  has  often  been  placed  at  a  much 
higher  figure.  By  the  Commercial  and  Financial  Chronicle  it  was 
estimated  that  nine-tenths  of  what  was  paid  by  the  public  did  not 
reach  tbe  treasury.  —  Issue  of  Dec.  3,  1870. 

2  Commercial  and  Financial  Chronicle,  issue  of  May  11, 18G7,  quotes 
current  price  of  distilled  spirits  as  $1.35. 


INDIRECT   TAXES    UPON   CONSUMPTION.     151 

product  will  be  illicitly  or  illegally  manufactured ;  and 
when  that  point  is  reached,  the  losses  and  penalties  con- 
sequent upon  detection  and  conviction  —  no  matter  how 
great  may  be  the  one  or  how  severe  the  other  —  will  be 
counted  in  by  the  offenders  as  a  part  of  the  necessary 
expenses  of  their  business ;  and  the  business,  if  forcibly 
suppressed  in  one  locality,  will  inevitably  be  renewed 
and  continued  in  some  other.  It  is,  therefore,  matter  of 
the  first  importance  for  every  government,  in  framing 
laws  for  the  assessment  and  collection  of  taxes,  to  en- 
deavor to  determine,  not  only  for  fiscal,  but  for  moral  pur- 
poses, when  the  maximum  revenue  point  in  the  case  of 
each  tax  is  reached,  and  to  recognize  that,  in  going  beyond 
that  point,  the  government '  overreaches '  or  cheats  itself. 
"  Obviously,  those  who  in  the  past  have  shaped  the 
policy  of  the  United  States  in  respect  to  the  taxation 
of  distilled  spirits  for  the  purpose  of  revenue  have, 
for  the  most  part,  never  studied  this  aspect  of  the 
the  case,  or  cared  to  encourage  any  one  to  do  so ;  but 
on  the  contrary,  as  has  been  somewhat  humorously 
expressed,  'they  have  held  out  to  the  citizen,  on  the 
one  hand,  a  temptation  to  violate  the  law  too  great 
for  human  nature,  as  ordinarily  constituted,  to  resist; 
and  in  the  other,  writs  for  personal  arrest  and  seizure 
of  property,  and  thus  equipped,  have  announced  them- 
selves ready  for  business."  * 

3.    Speculation. 
In  this  connection  we  can  but  speak  in  brief  of  the 
speculation  which  the  excise  engendered,  and  which  was 

1  Special  letter  to  Hon.  J.  G.  Carlisle  on  "Internal  Revenue  Tax 
on  Distilled  Spirits,  Malt  Liquors,  and  Tobacco,"  July  8,  1893,  p.  6. 


152  THE  INTERNAL   REVENUE  SYSTEM. 

so  universal  in  all  branches  of  business.  Officials  in  all 
circles  were  infected  by  it,  and  but  few  escaped  the 
charge  of  having  trafficked  in  the  country's  necessities. 
To  accuse  the  framers  of  the  measures,  however,  with 
the  intent  of  purposely  promoting  private  ends,  would 
be  to  cast  a  reflection  upon  the  characters  of  some  of 
the  noblest  figures  of  the  period  —  upon  men  whose  aim 
was  single  to  their  country's  good.  But  had  the  legis- 
lation of  the  period  been  devised  for  the  purpose  of 
encouraging  speculation,  it  could  hardly  have  been  more 
productive  of  it ;  for  rates  were  constantly  liable  to 
change  in  conformity  with  the  demands  for  revenue, 
and  prices  were  in  such  a  state  of  flux  that  skilful 
manipulators  of  the  market  were  able  to  anticipate  the 
action  of  Congress,  and  to  realize  upon  the  increase  of 
prices  which  followed  every  advancement  of  rates.  The 
rapid  upward  rush  of  gold  in  the-  summer  of  1864, 
together  with  the  passage  of  the  revenue  act  of  that 
year,  doubling  rates  upon  nearly  all  articles,  and  increas- 
ing those  upon  tobacco  and  distilled  spirits  from  six 
hundred  to  one  thousand  per  cent  of  the  original  cost, 
quickened  this  spirit ;  for,  unwisely,  the  new  rates  upon 
the  latter  articles  were  not  made  operative  upon  exist- 
ing stock,  and  speculators  on  every  hand  began  to  fore- 
stall the  market,  so  that  neither  the  government  nor 
the  consumer  was  benefited  by  the  change.  To  such 
an  extent  was  this  spirit  of  speculation  carried,  that, 
by  the  close  of  the  fiscal  year  1864,  there  had  been 
made  and  stored  in  anticipation  of  this  advance  at 
least  forty  millions  of  gallons  of  whiskey,  an  amount 
sufficient  to  satisfy  the  demands  of  the  trade  for  twelve 
months  at  least;  while  it  was  computed  that  in  New 


INDIRECT   TAXES    UPON   CONSUMPTION.     153 

York  alone  there  had.  been  accumulated  from  seventy  to 
eighty  millions  of  cigars.1 

In  other  commodities  than  whiskey  and  tobacco  spec- 
ulation was  quite  as  active,  and  the  excise  was  in 
large  measure  responsible  for  it.  As  the  war  wore  on, 
and  its  magnitude  became  more  apparent,  this  spirit 
developed  into  a  mania.  Everybody  was  virtually  bet- 
ting upon  the  action  of  Congress  ;  and  it  does  not  re- 
quire wide  knowledge  of  men  or  of  history  to  convince 
one  that  the  influence  of  this  spirit  manifested  itself 
in  legislative  halls,  urging  to  a  still  further  increase 
of  taxes  for  the  furtherance  of  private  ends.  Certain 
it  is,  that,  in  the  case  of  tobacco  and  distilled  spirits, 
private  interests  were  enhanced  by  the  increase  of  the 
rates  more  than  were  the  revenues,  while  for  years 
thereafter  influences  were  operative  which  enabled  dis- 
honest rings  to  connive  with  officials  in  such  a  way 
as  to  deprive  the  government  of  a  large  part  of  this 
important  source  of  the  revenue. 

Such  is  the  experience  of  the  country  down  to  the 
close  of  the  decade  introduced  by  the  Civil  War.  The 
later  history  of  these  taxes,  while  in  many  respects  but 
a  continuation  and  repetition  of  what  has  preceded,  can 
be  treated  more  logically  in  a  later  paragraph,  inasmuch 
as  the  year  1870  marks  a  change,  not  only  in  the  method 
of  administration,  but  also  in  the  beginning  of  the  nar- 
row, more  restricted  system  of  internal  taxation  which 
has  continued  to  the  present  day,  and  in  which  the 
taxes  upon  distilled  spirits  and  tobacco  form  the  central 
figures. 

1  Estimated  by  the  Revenue  Commission.    House  Ex.  Doc.  No.  34, 

Thirty-ninth  Congress,  p.  6. 


154  THE  INTERNAL   BE  VENUE  SYSTEM. 


II.     FERMENTED    LIQUORS. 

By  the  measure  of  July  1,  1862,  the  duty  imposed 
upon  fermented  and  malt  liquors,  such  as  beer,  ale, 
porter,  etc.,  was  $1.00  per  barrel  of  31  gallons.  This 
act  remained  in  operation  but  six  months,  when  the 
r;ite  was  reduced  to  sixty  cents  per  barrel,1  with  the  pro- 
vision added  that  the  act  should  expire  by  limitation 
April  1,  1864.  Subsequent  to  the  latter  date  the  origi- 
nal duty  of  $1.00  was  revived,  and  has  been  in  operation 
ever  since.  In  recent  years  (since  the  amendatory  law 
of  July  20,  1868)  the  tax  has  been  collected  by  means 
of  stamps,  one  of  which,  "  denoting  the  amount  of  the 
tax,"  must  be  affixed  over  the  spigot  hole  or  tap  (of 
which  there  shall  be  but  one),  in  such  a  way  that  the 
stamp  will  be  destroyed  upon  the  withdrawal  of  the 
liquor  from  the  barrel. 

The  tax  of  $1.00  per  barrel  is  equivalent  to  3.22  cents 
per  gallon,  or  an  ad  valorem  rate  of  twenty  per  cent. 
One  barrel  of  31  gallons  equals  248  pints  or  496  half- 
pints,  and  the  present  tax  is  therefore  equivalent  to 
one-fifth  of  a  cent  per  half -pint  or  per  glass,  as  usually 
sold  at  retail. 

The  records  of  the  early  administration  of  this  tax 
present  the  same  phenomena  which  characterized  other 
branches  of  the  revenue.  The  tax  was  but  poorly  col- 
lected, and  evasion  was  wide-spread.  An  improvement 
was  early  manifest  in  this  latter  respect,  however,  for 
the  number  of  barrels  returned  for  taxation  increased 
with  considerable  regularity,  irrespective  of  the  rate  of 
duty.  Thus,  while  the  number  of  barrels  upon  which 
i  Act  of  March  3,  1863. 


INDIRECT   TAXES    UPON   CONSUMPTION,     loo 

the  tax  was  paid  was  but  2.000,625  in  1863,  in  the  }7ear 
following  it  rose  to  3,141,381,  while  two  years  later 
over  5,000,000  barrels  were  reported.  But,  despite  the 
growing  observance  of  the  law,  a  large  portion  of  the 
product  still  escaped  the  vigilance  of  the  assessor ;  and 
in  1865  the  Revenue  Commission,  after  a  most  careful 
investigation  of  this  portion  of  the  revenue  service,  and 
after  consultation  with  nearly  every  large  producer  in 
the  country,  came  to  the  conclusion  that  the  annual 
product  of  the  country  was  upwards  of  6,000,000 
barrels,  or  considerably  more  than  had  been  returned 
for  taxation  in  that  year.  The  loss  to  the  revenue  was 
estimated  at  $2,400,000,  due  in  large  measure,  thought 
the  Revenue  Commission,  to  the  faulty  methods  of  ad- 
ministration which  then  prevailed.1 

These  defects  were  in  large  measure  corrected  by  the 
use  of  soluble  stamps  as  a  means  of  collection,  which 
could  not  be  re-used  !  With  this  modification  in  the 
method  of  assessment,  the  principal  avenues  of  escape 
were  closed ;  and  the  annual  returns  immediately  rose 
by  nearly  forty  million  gallons,  while  the  receipts  for 
the  first  year  thereafter  were  increased  by  three-quarters 
of  a  million  dollars.  Since  that  time  the  revenues  have 
steadily  risen,  in  recent  years  at  a  most  phenomenal  rate. 
In  fact,  this  increase  in  the  consumption  of  malt  liquors 
has  been  more  rapid  than  the  increase  in  population. 
In  1863  the  annual  consumption  of  malt  liquors  of  all 
kinds  was  sixty  million  gallons.  Two  years  later  the 
product  had  nearly  doubled,  and  amounted  to  3.2  gallons 
per  capita.  By  1870  the  annual  consumption  had  risen 
to  5.2  gallons  per  capita,  and  during  the  decade  follow- 
i  House  Ex.  Doc.  No  34,  Thirty-ninth  Congress,  p.  20. 


156  THE  INTERNAL   REVENUE  SYSTEM. 

ing,  it  again  increased  more  than  one  hundred  per  cent. 
Since  that  time  the  increase  in  production  has  more 
than  kept  pace  with  the  growth  in  population,  until 
to-day  the  consumption  approximates  sixteen  gallons 
per  person,  and  the  total  annual  output  of  the  country- 
is  one  thousand  million  gallons. 

The  receipts  have  increased  in  like  proportion  until 
malt  liquors  of  various  kinds  yield  an  annual  revenue  of 
over  thirty  million  dollars.1 

III.     TOBACCO. 

The  same  lamentable  errors  which  characterized  the 
taxation  of  distilled  spirits  distinguished  the  early 
efforts  of  Congress  to  derive  revenues  from  tobacco. 
Like  the  former  commodity,  tobacco  is  a  staple  article, 
the  consumption  of  which  does  not  vary  much  from 
year  to  year,  and  is  little  affected  by  the  variations  of 
price.  The  equation  of  demand  and  supply  is  not  a 
parabola,  but  a  straight  line.  Knowing,  then,  the  annual 
consumption  and  the  rate  of  taxation,  it  is  a  compara- 
tively easy  matter  for  the  financier  to  determine  with 
tolerable  exactitude  the  probable  revenue  to  be  expected 
therefrom.  Such,  at  least,  are  the  teachings  of  economic 
theory,  and  in  this  instance  the  teachings  of  experience 
and  of  the  schools  proximately  coincide. 

At  the  present  time  tobacco  forms  one  of  the  chief 
sources  of  revenue  in  nearly  every  civilized  State;  in 
some,  as  in  France,  Italy,  and  Austria,  through  govern- 

i  In  1892  the  receipts  amounted  to  $30,037,452 ;  in  1893  to  $32,548,- 
983;  and  in  1894,  even  under  the  unprecedented  commercial  depres- 
sion, they  amounted  to  $31,414,788. 


INDIRECT   TAXES    UPON  CONSUMPTION.     157 

mental  manufacture  and  sale,  while  in  others  as  a  basis 
of  taxation. 

Our  own  experience  is  limited  to  the  three  decades 
subsequent  to  the  general  excise  measure  of  1SG2.  This 
Act,  so  comprehensive  in  its  enactments,  did  not  neglect 
tobacco.  By  it  all  manufactured  chewing  tobacco  was 
rendered  dutiable  at  the  rate  of  ten  cents  per  pound 
on  grades  valued  at  less  than  thirty  cents  per  pound, 
while  on  better  grades  a  uniform  rate  of  fifteen  cents 
per  pound  was  levied.  Snuff  was  rated  at  twenty  cents 
per  pound,  and  smoking  tobacco  at  from  two  to  five 
cents  per  pound.  Upon  cigars  a  rough  attempt  at 
ad  valorem  rates  was  attempted  by  the  following 
schedule  :  — 

VALUE.  TAX-RATE. 

If  valued  at  not  more  than  $  5. 00  per  1000  at  $1.50  per  1000. 
"  "  10.00        "  2.00 

"  20.00        "  2.50 

If  valued  at  over  20.00        "  3.50 

These  charges  were  too  low  in  the  opinion  of  the  com- 
missioner, as  compared  with  what  other  commodities 
were  bearing.  At  this  time  unmanufactured  tobacco 
was  taxed  at  the  rate  of  seventy-seven  cents  per  pound 
in  England,  while  the  manufactured  article  paid  $2.33 
per  pound.  From  these  taxes  Great  Britain  secured 
an  annual  revenue  of  upwards  of  thirty  millions  of 
dollars ;  while  in  the  United  States,  where  the  con- 
sumption was  much  greater,  the  receipts  for  1863  were 
but  three  millions. 

This  meagre  productivity  was  due  to  two  causes : 
(1)  the  newness  of  the  law  and  the  inexperience  of 
the  administration ;  and  (2)  the  inadequacy  of  the  rate 


158         THE  INTERNAL   REVENUE  SYSTEM. 

imposed.  To  the  mind  of  the  commissioner  a  remedy 
for  the  former  evil  was  to  be  found  in  a  change  of  the 
method  of  assessment,  so  that  the  tax  would  be  col- 
lected upon  the  raw  leaf,  as  was  the  custom  in  England ; 
while  a  simple  nostrum  for  the  latter  difficulty  lay  in 
raising  the  rates.1 

To  Congress  nothing  seemed  more  axiomatic  than 
that  "  two  and  two  make  four,"  even  in  the  arithmetic 
of  taxation ;  and  forthwith  the  same  mistaken  legislation 
followed  which  we  have  seen  to  have  been  so  fallacious 
in  the  case  of  distilled  spirits.  Chewing  and  smoking 
tobacco  were  still  rated  differently,  the  duty  on  the 
former  being  increased  to  thirty-five  cents  per  pound, 
while  the  latter  paid  fifteen  and  twenty-five  cents,  ac- 
cording to  description  ;  snuff  was  taxed  at  thirty-five 
cents  per  pound,  while  cigarettes  were  added  to  the  list 
at  a  rough  ad  valorem  rate.  Upon  cigars  the  attempt 
to  take  cognizance  of  the  difference  in  grades  was 
still  maintained,  and  the  following  exorbitant  rates 
imposed  : 2  — 

VALUE.  TAX  BATE. 

Below      $  5.00  per  thousand  in  value     .  $  3.00  per  1000. 
Between      5.00  and  $15.00  per  1000     .     .        8.00 

15.00    "       30.00        "        ...       15.00        " 

"  30.00    "       45.00        "       ...       25.00        " 

Over  45.00  in  value  "       ...      40.00        " 

In  the  administration  of  the  tobacco  tax,  the  early 
experience  is  instructive.  All  methods  were  more  or 
less  tentative.  No  precedents  existed  at  home ;  and 
foreign  nations,  as  a  rule,  taxed  the  article  in  the  leaf. 

1  Report  on  Finances,  1863,  pp.  65,  66. 

2  Act  of  June  30,  1864. 


INDIRECT   TAXES    UPON  CONSUMPTION.    159 

As  a  result,  early  legislation  was  more  or  less  experi- 
mental, and  the  revenues  suffered  in  consequence. 

The  tax  was  levied  at  the  place  of  manufacture,  and 
was  a  mixture  of  specific  and  ad  valorem  rates.  Stamps 
had  not  yet  come  into  use  in  this  branch  of  the  service, 
nor  had  the  practice  of  branding ;  so  that  it  was  no  dif- 
ficult matter  to  remove  the  article  from  one  place  to 
another,  where  it  might  be  disposed  of  surreptitiously 
without  payment  of  the  tax.  By  the  amendatory  Act  of 
March  3,  1863,  however,  the  practice  of  the  department 
was  in  this  respect  improved ;  and  the  inspector  was 
instructed  to  brand  upon  the  cask  or  package  the  weight 
and  quality  of  the  tobacco,  as  well  as  his  own  name  and 
the  date  of  the  inspection.  By  this  means  it  became  an 
easy  matter  to  determine  whether  the  duty  had  been 
paid  or  not,  and  to  detect  any  attempted  evasion.  Later 
modifications  placed  severe  restrictions  upon  the  manu- 
facturers by  insisting  upon  minute  reports  concerning 
their  methods  of  business,  stock  on  hand,  destination 
and  quality  of  the  product,  etc.  These  returns  were 
made  weekly,  and  in  many  instances  were  quite  onerous 
to  the  producer ;  for  they  amounted,  in  effect,  to  a  labor 
tax  upon  the  industry.  In  order  to  quiet  the  complaint 
that  the  tax  rendered  large  capital  necessary  to  the  con- 
duct of  the  business,  the  bonded  warehouse  system  was 
extended  to  it,  so  that  the  duty  became  payable  only  on 
the  disposition  of  the  product.1 

The  assessment  of  the  tax  upon  cigars  was  fraught 
with  probably  the  greatest  complications.  The  Act  pre- 
scribed that  the  valuation  placed  upon  the  article  by  the 
assessor  should  be  "  the  value  of  the  cigars  exclusive  of 
1  Act  of  June  30,  1864. 


160  THE  INTERNAL   REVENUE  SYSTEM. 

the  tax."  The  rate,  as  we  have  seen,  was  not  a  propor- 
tional, ad  valorem  one,  but  a  graduated  tax  assessed 
according  to  classes  upon  the  price  of  the  cigars.  By- 
reference  to  these  rates,  it.  will  be  seen  that  under  these 
provisions  no  schedule  of  prices  could  be  devised  which 
would  satisfy  the  law  in  the  majority  of  cases.  Take, 
for  illustration,  the  case  of  a  thousand  cigars  selling  at 
twelve  dollars.  The  value  is  determined  by  the  sale; 
and  the  question  arises,  what  is  the  tax  ?  It  must  obvi- 
ously be  either  three  dollars  or  eight.  If  the  former, 
then  the  cigars,  exclusive  of  the  tax,  are  worth  nine  dol- 
lars. But  cigars  valued  at  more  than  five  dollars  must 
pay  a  tax  of  eight  dollars.  Then  put  on  the  tax  of 
eight  dollars,  and  the  value  of  the  cigars  is  found  to  be 
four  dollars,  and  not  dutiable  in  this  grade.  Neither 
tax  is  appropriate  to  the  value  —  one  is  too  little,  the 
other  too  great.  The  same  difficulty  is  found  in  rela- 
tion to  cigars  selling  at  any  price  between  eight  and 
thirteen  dollars,  between  twenty-two  and  thirty  dollars, 
etc.  The  law  furnished  no  rule  by  which  they  might 
be  assessed,  and  the  commissioner  therefore  instructed 
the  officials  to  adopt  the  interpretation  which  imposed 
the  lowest  rate.1 

Another  result  of  this  anomalous  method  of  assess- 
ment was  that  it  became  more  profitable  for  the  manu- 
facturer to  sell  his  cigars  at  eleven,  rather  than  fifteen, 
dollars  per  thousand  ;  at  twenty-five  rather  than  thirty- 
one  dollars,  and  at  sixty-nine  rather  than  eighty-five. 
The  value  as  determined  by  the  sale  was  the  determi- 
nant of  the  tax,  and  the  returns  of  the  producer  were 
the  only  evidence  of  value.  It  thus  offered  a  tempta- 
1  Report  on  Finances,  1864,  p.  62. 


INDIRECT   TAXES    UPON  CONSUMPTION.     161 

tion  to  undervaluation,  which  was  often  taken  advantage 
of.  Were  the  duty  an  ad  valorem  one,  this  opportunity 
would  not  exist ;  and  the  commissioner  therefore  sug- 
gested that  the  latter  mode  of  assessment  be  adopted, 
provided  a  tax  upon  the  leaf  seemed  inadvisable.1 

Congress  realized  the  anomalies  of  the  tax,  but  chose 
to  follow  other  avenues  for  relief.  It  thereupon  placed 
the  cap-sheaf  upon  the  series  of  blunders  by  levying  a 
uniform  specific  rate  of  ten  dollars  per  thousand  upon 
all  cigars,  no  matter  what  the  quality  or  value  of  the 
same  might  be,  and  also  increased  the  rate  on  tobacco.2 
The  uniform  rate  rendered  the  tax  simple  of  assess- 
ment, which  is  certainly  a  desideratum  in  any  duty ; 
but  it  is  liable  to  the  criticism  that  it  placed  an  undue 
burden  upon  the  cheaper  grades  of  cigars,  while  the 
higher  grades  were  but  slightly  affected.  It  also  bore 
with  some  severity  upon  the  small  domestic  producer, 
who  was  often  unable  to  advance  so  large  a  tax. 
This  rate  remained  in  force  but  one  year,  and  it  is 
of  interest  to  note  that  the  number  of  cigars  returned 
for  taxation  during  this  period  was  less  than  in  any 
other  year  either  before  or  subsequent  to  its  passage.3 

1  Report  on  Finances,  1864,  p.  62.  2  Act  of  March  3,  1865. 

3  The  total  receipts  from  cigars,  together  with  the  aggregate  num- 
ber returned,  and  the  rate  of  the  tax,  from  1863  to  1870,  were  as 
follows :  — 

YEAE.  BATE  OF  TAX.  ^  !  "TiTS  °F         COLLECTIONS. 

1863  $  1.50  to  $  3.50  per  M 199,288,2S4  $476,589 

1864  1.50  to      3.50        "       492,780,700  1,255,424 

1865  3.00  to    40.00       "       713,001,099  3,087,421 

r1866       10.00  "       347,674,259  3,476,236 

1867  2.00  to  5.00       "  483,806,450  3,661,984 

1868  5.00  "  590,335,052  2,951,675 

1869  5.00  "  993,287,429  4,960,952 

1870  5.00  ••  1,153,352,191  5,718,780 


162         THE  INTERNAL   REVENUE  SYSTEM. 

The  experience  of  this  period  also  furnishes  an  example 
of  the  influence  of  a  tax  in  determining  the  equation  of 
demand  and  supply  of  an  article  of  universal  consump- 
tion. Thus,  in  1866,  with  the  uniform  rate  of  ten  dol- 
lars per  thousand  obtaining  upon  all  grades  of  cigars, 
only  347,674,259  were  returned  for  taxation;  while  in 
1869,  with  the  rate  reduced  one-half,  the  number  in- 
creased nearly  threefold,  or  to  993,287,429. 

Conclusions  in  regard  to  the  social  and  economic  ten- 
dencies of  a  tax  are,  from  the  nature  of  the  phenomena, 
but  tentative,  and  on  the  whole  unsatisfactory.  The 
coworking  of  diverse  forces  precludes  exactitude  in  the 
tracing  of  causal  relations,  and  we  are  compelled  to 
depend  more  or  less  upon  conjecture.  It  is  not  so  with 
the  purely  fiscal  aspect  of  the  study,  for  here  we  deal 
with  phenomena  whose  results  and  meaning  are  clearly 
demonstrable. 

In  the  discussion  of  the  duty  upon  distilled  spirits, 
we  have  seen  that  there  exists  an  intimate  relation  be- 
tween the  rate  of  the  tax  and  the  extent  of  fraud  and 
evasion  ;  and  it  is  not,  therefore,  a  matter  of  surprise  that 
the  same  results  are  to  be  found  in  the  taxation  of 
tobacco. 

The  returns  from  manufactured  tobacco  during  the  same  period 
were  as  follows :  — 


BATE         AVERAGE  BATE  QUANTITY 

OF  TAX.  TEE  I'ul'SU.  IN  POUNDS. 


YEAB.  nvin-r  T>i7n    nnr\i,  IV    BAll-Jl.a  tULLhtUUSB. 


1863  2  to  20  cents  10  cents 23,852,387  S  2,613,438 

1864  5  to  20  "  11  "  64,577,097  7,327,618 

1865  5  to  40  "  22  "  37,641,822  8,300,372 

1866  15  to  40  "  34  "  37,493,785  13,038,095 

1867  15  to  40  "  34  "  47,631,494  16,043,842 

1868  15  to  40  "  34  "  46,764,150  15,692,415 

1S69  16  to  32  "  27  "  64,305,026  17,371,063 

1870  16  to  32      "  27  "  90,288,082  24,300,4S3 


INDIRECT   TAXES    UP  OX  CONSUMPTION.     163 

The  magnitude  of  the  frauds  committed  under  the 
stimulus  of  the  high  rate  imposed  will  never  be  known ; 
but  that  it  was  very  general  the  records  of  officials  and 
the  tone  of  the  press  of  the  day  testify.  It  was  cur- 
rently asserted  at  the  time  that  scarcely  one-half  of  the 
annual  product  of  the  country  was  reported  for  inspec- 
tion, while  competent  authorities  estimated  the  loss 
much  higher.  Says  the  Special  Commissioner  of  Rev- 
enue, writing  in  1866  :  "  The  losses  which  have  ac- 
crued and  are  now  accruing  to  the  revenue  through  the 
failure  to  collect  the  tax  .  .  .  are  of  an  amount  almost 
to  exceed  belief  —  the  losses  on  tobacco  alone,  in  a  single 
section  of  the  country,  being  reported  to  the  commis- 
sioner by  a  most  competent  authority  as  in  probable 
excess  of  twenty  thousand  dollars  daily."  1  The  same 
official  later  stated  that  "the  books  of  some  of  the 
largest  manufacturers  in  this  country  show  that  their 
aggregate  sales  of  smoking  tobacco  for  the  whole  of  the 
last  year  have  not  been  in  excess  of  the  average  of 
sales  which,  before  the  imposition  of  the  tax,  were  ef- 
fected in  a  single  week."  2 

The  failure  to  collect  the  tax  was  due  to  causes  simi- 
lar to  those  operative  in  the  case  of  distilled  spirits. 
They  were  mainly  four  in  number,  namely ;  (1)  a  very 
large  percentage  of  the  losses  were  due  to  incompetency 
and  complicity  of  officials,  for  it  was  cheaper  to  secure 
the  co-operation  of  the  inspector  by  corrupt  means  than 
to  pay  the  tax ;  (2)  the  use  of  counterfeit  or  illegal  in- 
spection brands  was  a  prevalent  cause  of  loss,  as  there 
existed  no  uniformity  in  this  regard  on  the  part  of  the 

1  Report  of  the  Special  Commissioner  of  Revenue,  1866,  p.  4. 

2  Ibid.,  1868. 


164  THE  INTERNAL   REVENUE  SYSTEM. 

different  officials;  (3)  the  re-use  of  packages  or  casks 
which  had  been  previously  inspected  and  properly 
branded  further  depleted  the  revenue ;  as  did  (4)  the 
substitution  of  other  and  better  grades  of  tobacco  for 
those  upon  which  the  tax  had  been  already  paid.  Con- 
siderable loss  also  arose  through  the  fraudulent  use  of 
the  warehouse  system.1 

So  flagrant,  in  fact,  did  these  frauds  at  last  become 
that  the  manufacturers  themselves  headed  a  movement 
for  reform,  and  presented  a  memorial  to  Congress  indi- 
cating lines  for  legislation,  which  were  embodied  in  part 
in  a  later  enactment,  and  are  substantially  identical 
with  those  in  use  at  the  present  clay.  Greater  simplicity 
in  rates  was  needed,  as  were  more  efficient  methods  of 
collection ;  and  these  the  measure  of  July  20,  1868, 
aimed  to  secure  by  reducing  the  rates,  rendering  them 
payable  by  means  of  stamps,  while  the  most  minute 
provisions  were  made  for  marking,  packing,  removal, 
sale,  etc. 

The  effect  of  these  modifications  was  immediate.  Re- 
ceipts rose  from  $18,700,000  in  18G8,  to  over  $31,000,000 
in  1870,  and  this  in  the  face  of  a  very  general  reduction 
of  rates.  Cigars  manifested  the  greatest  increase  (95 
per  cent),  from  which  we  are  to  infer  that  a  larger  por- 
tion of  them  had  previously  escaped  taxation.2  From 
this  time  on  the  receipts  from  this  sovirce  steadily  in- 
creased at  a  normal  rate  corresponding  to  the  natural 
growth  of  consumption,  until,  in  1876,  tobacco  produced 
somewhat  more  than  one-sixth  of  the  total  revenues  of 
the  government,  or  $40,000,000. 

1  Report  of  Special  Commissioner  of  the  Revenue,  1868,  pp.  35-38. 

2  Vide  "Tobacco  Tax,"  Quarterly  Journal  of  Economics,  January, 
1891. 


INDIRECT  TAXES    UPON  CONSUMPTION.     165 

At  this  time  the  appearance  of  the  surplus  and  the 
clamoring  of  special  interests  hostile  to  any  reduction  of 
the  customs  duties  led  to  measures  for  the  complete 
abolition  of  the  tobacco  tax,  or  at  least  for  a  diminution 
of  the  rates.  In  1879  Congress  in  part  conceded  to  the 
pressure  by  reducing  the  rates  upon  snuff  and  other' 
manufactured  tobacco  to  sixteen  cents  per  pound,  in- 
stead  of  twenty-four,  while  the  duty  upon  cigars  and 
cigarettes  remained  unaltered.  By  1883,  the  revenues 
continuing  redundant,  the  rate  upon  the  former  article 
was  further  reduced  to  eight  cents  per  pound,  while  the 
duty  upon  cigars  was  cut  down  to  three  dollars  per 
thousand. 

The  result  of  these  alterations  was  gratifying  in  so 
far  as  it  indicated  the  efficiency  of  existing  methods  of 
administration  and  collection  ;  for  while  the  revenues  fell 
off  from  forty-seven  millions  in  1882,  to  twenty-six  mil- 
lions in  1881,  the  increase  in  the  taxable  product  was 
little  more  than  normal.1 

From  this  time  down  to  the  present  day,  constant  in- 
fluence has  been  brought  to  bear  on  Congress,  advocat- 
ing the  complete  abolition  of  the  tax ;  and,  as  a  partial 
concession  to  these  clamors,  the  rateupon  manufactured 
tobacco  has  been  reduced  to  six  cents  per  pound,  while 
special  license  taxes  upon  retail  dealers  have  been  dis- 
pensed with  altogether.2 

Just  what  effect  has  followed  upon  this  reduction  of 
duties  in  the  price  of  the  article,  it  is  difficult  to  deter- 
mine with  accuracy.     There  is  reason  to  believe,  how- 

1  For  list  of  collections,  as  well  as  rates  of  taxation  and  amount 
returned  for  taxation,  see  table,  p.  226,  as  well  as  Appendix. 

2  Act  of  Oct.  1,  1890. 


166  THE  INTERNAL   REVENUE  SYSTEM. 

ever,    that    but    slight    benefits     have   accrued     to    the 
consumer. 

IV.       THE    GENERAL    EXCISE    UPON"    MANUFACTURES    AND 
PRODUCTS. 

The  first  efforts  of  the  Revenue  Commission,  subse- 
quent to  the  close  of  the  war,  were  directed  towards 
the  relief  of  trade  and  industry  from  the  burdens  of  the 
complicated  system  of  taxes  which  obtained  upon  man- 
ufactures and  products.  It  was  to  the  operations  of 
the  general  excise,  thought  the  Commission,  that  the  in- 
flation of  prices,  the  insecurity  of  commercial  relations, 
the  chaos  of  speculation  and  business  disaster,  as  well  as 
the  burdensome  taxes  of  the  consumer  and  wage-earner, 
were  in  a  great  part  attributable.  Not  only  were  the 
duties  so  heavy  as  .to  cause  a  marked  diminution  in  the 
consumption  of  staple  commodities,  but  so  indiscrimi- 
nately were  they  levied,  with  so  little  regard  to  the  laws 
of  trade,  that  industry  was  blighted  thereby,  while 
Capital  was  diverted  from  the  natural  channels  of  its 
activity. 

The  distinguishing  feature  of  all  the  fiscal  legislation 
of  the  time  was  the  wide  diffusion  of  taxes.  The  one 
absorbing  demand  of  the  Treasury  was  for  revenues,  and 
all  other  considerations  were  rendered  subordinate  to 
that  end.  Everything  possible  was  made  to  contribute 
to  the  country's  coffers,  and  in  many  instances  the  same 
article  was  taxed  over  and  over  again  before  it  reached 
the  consumer.  Every  product  of  the  mill  or  factory  was 
taxed  at  each  turn  of  its  manufacture,  so  that  not  infre- 
quently an  article  bore  a  duty  imposed  twice,  thrice,  and 
even   four  times,  before    it    reached    the  market.     The 


INDIRECT   TAXES    UPON   CONSUMPTION.      167 

system  operated  like  a  series  of  barriers,  across  which 
passage  could  be  secured  only  by  the  payment  of  toll, 
which  was  re-exacted  at  every  phase  of  the  process 
of  manufacture.  This  duplication  led  to  an  undue  en- 
hancement of  prices.  Moreover,  exact  calculation  in 
production  became  impossible,  as  the  tax  was  liable  to 
alteration  at  any  moment,  and  the  accumulation  of  a 
large  stock  of  goods  upon  which  a  heavy  duty  had  been 
paid  might  prove  ruinous  to  a  producer.  For  this  reason 
production  was  made  to  conform  as  nearly  as  possible  to 
immediate  demand. 

At  the  same  time  the  lack  of  harmony  between  the 
excise  and  customs  duties  was  a  further  disturbing  ele- 
ment ;  for,  although  these  taxes  were  designed  to  be 
mutually  compensatory  (and  considerable  skill  was  shown 
in  the  arrangement),  it  was  soon  discovered  that  many 
divergencies  existed  between  them.  So  numerous,  in  fact, 
were  they,  and  due  to  such  irremediable  causes,  that 
the  efforts  of  Congress  to  relieve  them  were  only  in  part 
successful. 

As  a  consequence,  many  industries  were  seriously 
affected,  in  some  instances  a  transfer  of  capital  to  other 
countries  being  the  result.  The  manufacture  of  um- 
brellas and  books  is  an  instance  in  point,  in  the  pro- 
duction of  which  it  was  said  that  foreign  cheap  labor, 
coupled  with  a  low  excise,  speedily  enabled  the  English 
producer  to  monopolize  our  market.1  In  the  production 
of  finished  railroad  and  bar  iron  the  results  were  similar. 
During  the  two  years  previous  to  1864  but  little  railroad 
iron  was  imported,  the  customs  duty  being  well-nigh 
prohibitive.  In  the  latter  year,  however,  the  internal  tax 
1  See  Report  of  Revenue  Commission,  p.  15. 


168  THE  INTERNAL   REVENUE  SYSTEM. 

was  increased,  to  about  nine  dollars  per  ton,  giving  a 
protection  to  the  domestic  producer  of  four  dollars  per 
ton,  which  was  held  by  the  commissioner  to  be  insuffi- 
cient to  protect  the  market,  a  very  large  portion  of  the 
consumption  of  the  year  following  being  imported.1 

In  the  case  of  those  industries  controlled  by  strong 
corporate  interests,  and  able  to  foresee  and  take  advantage 
of  every  fluctuation  of  the  market,  this  insecurity  of 
business  relations  offered  great  opportunities  for  specu- 
lative gains.  To  the  small  producer,  however,  the  ex- 
cise was  an  unmixed  evil.  The  advancement  of  the  tax 
demanded  additional  capital  in  his  business,  while  in 
many  ways,  as  in  the  case  of  the  discounts  upon  stamps, 
it  discriminated  against  him.2  Especially  burdensome 
was  this  interference  with  that  numerous  body  of  shoe- 
makers, dressmakers,  milliners,  etc.,  who  produce  mainly 
for  immediate  and  local  consumption.  In  fact,  "  of  all 
the  taxes  imposed,"  said  the  special  Revenue  Commis- 
sion, "  none  probably  have  been  more  effectual  in  grind- 
ing the  faces  of  the  poor  "  than  this,  "  while  there  are 
few  which  have  given  more  annoyance  to  the  revenue 


1  "  The  present  tax  on  iron  consumed  in  the  United  States,  in  the 
complete  forms  of  railroad  and  bar  iron,  will  amount,  when  the  coal 
consumed  is  taken  into  the  account,  to  about  seven  dollars  per  ton ; 
while  other  taxes  which  indirectly  fall  upon  this  production  will 
raise  the  tax  to  one  or  two  dollars  per  ton  more.  During  the  two  fis- 
cal years  preceding  the  last,  but  little  railroad  iron  was  imported ; 
but  in  the  year  ending  June,  18(34,  a  rapid  increase  in  such  importa- 
tion began,  and  nearly  one  hundred  and  twenty  thousand  tons,  valued 
at  four  million  eight  hundred  thousand  dollars,  were  imported.  This 
is  equal  to  about  half  the  entire  quantity  made  in  the  United  States, 
which  is  approximately  stated  at  two  hundred  and  eighty  thousand 
tons." — Report  on  Finances,  18G4,  p.  65. 

2  See  ante,  p.  123. 


INDIRECT   TAXES    UPON   CONSUMPTION.     169 

officers  entrusted  with  their  assessment  and  collec- 
tion." 1 

The  rates  imposed  were,  moreover,  excessive,  in  some 
cases  being  so  burdensome  as  to  cause  a  complete  sus- 
pension of  business.  In  the  case  of  the  woollen  industry, 
which  was  relieved  from  the  full  effect  of  the  excise  by 
compensatory  tariff  duties,  it  was  estimated  that  in  the 
years  1864  and  1865,  when  the  duty  upon  woollens  was 
six  per  cent,  the  revenues  from  this  business  in  the 
State  of  Massachusetts  were  equal  to  nearly  twenty  per 
cent  of  the  entire  capital  invested  in  the  industry ;  while 
the  taxes  extracted  from  the  manufacture  of  boots  and 
shoes  in  that  State  during  the  same  year  were  equal  to 
thirty  per  cent  of  the  capital  employed  therein.2  Such 
are  but  isolated  examples  indicative  of  the  general  dis- 
turbance induced  by  the  excise ;  for  it  was  a  period  pre- 
eminently of  flux,  in  which  all  forms  of  industry  were 
endeavoring  to  adjust  themselves  to  changed  conditions 
of  production. 

The  method  of  levying  the  excise  was  a  mixed  one, 
partly  specific,  partly  ad  valorem,  a  distinction  rendered 
necessary  from  the  nature  of  the  objects  taxed,  as  well 
as  by  the  desire  to  harmonize  these  duties  with  those  of 
the  tariff,  which  were  modified  at  the  same  time  in  order 
to  compensate  the  domestic  producer  for  the  burdens  im- 
posed upon  him.  The  Committee  of  Ways  and  Means 
had  aimed  to  devise  a  system  as  diffuse  as  possible,  on 
the  theory  that  equality  in  taxation  is  universal  taxa- 
tion, a  principle  most  strongly  insisted  upon  in  our 
States.     Only  raw  materials  were  exempted ;  and  even 

1  House  Ex.  Doc.  No.  34,  Thirty-ninth  Congress,  p.  :'.*.>. 

2  Report  of  Special  Commissioner  of  Revenue,  18(17,  p.  28. 


170  TEE  INTERNAL   REVENUE  SYSTEM. 

here  the  exemption  was  in  many  cases  only  an  apparent 
one,  for  the  articles  were  frequently  taxed  in  an  in- 
direct way. 

By  the  early  law  of  July  1,  1862,  specific  duties,  were 
imposed  upon  mineral  coals,  oils  of  all  kinds,  gas,  paints 
and  colors,  coffee  and  spices,  cotton,  sugar,  snuff,  railroad 
arid  other  iron ;  while  upon  nearly  all  other  articles,  the 
product  of  the  mill  or  factory,  a  general  ad  valorem  rate 
of  three  per  cent  was  imposed. 

Careful  provision  was  made  for  the  assessment  and 
collection  of  these  taxes.  Every  manufacturer  was  re- 
quired to  furnish  the  assessor  a  verified  statement  of 
the  nature  of  his  business,  and  to  make  monthly  returns 
of  the  products  and  sales  in  such  form  as  the  commis- 
sioner prescribed.  Taxes  were  payable  monthly,  and 
were  declared  to  be  a  lien  upon  his  real  and  personal 
property;  while  the  collector  could  enter,  take  posses- 
sion, and  sell  any  goods  and  products  to  satisfy  the 
tax. 

From  the  date  of  this  Act  down  to  the  close  of  the 
war,  alterations  in  the  laws  were  frequent.  In  1864 
the  ad  valorem  rate  was  increased  to  five  per  cent  on 
the  majority  of  articles  previously  dutiable  at  three 
per  cent,  while  many  additional  articles  were  declared 
taxable.  Again,  in  1865,  these  rates  were  advanced 
twenty  per  cent,  or  from  five  to  six  per  cent  upon  all 
enumerated  articles,  while  the  specific  duties  were  in- 
creased in  a  like  manner. 

The  following  is  a  condensed  statement  of  the  total 
collections  from  specific  sources  of  manufactures  and 
products  for  the  years  extending  from  1863  to  1868 
inclusive  :  — 


INDIRECT   TAXES    UPON   CONSUMPTION.     171 

Boots  and  shoes $14,687,824 

Bullion 1,632,796 

Candles 1,549,928 

Clocks,  clock-movements,  etc 457,270 

Cloth  and  other  fabrics  of  cotton 38,006,287 

Cloth  and  other  fabrics  of  wool 29,922,434 

Clothing,  not  including  boots  and  shoes     .     .  25,422,745 

Coal 2,966,961 

Confectionery 3,541,773 

Cotton,  raw  " 68,072,389 

Gunpowder ...         1,045,395 

India  rubber 2,169,077 

Iron  and  steel  and  their  manufactures   .     .     .  35,306,728 

Leather  of  all  descriptions 14,350,793 

Oil  distilled  from  coal  and  crude  petroleum  .  20,456,552 
Paper,  including  pasteboard,  binders'  board, 

etc 4,336,177 

Petroleum,  crude 2,415, G97 

Pianofortes  and  other  musical  instruments    .  1,452,023 

Pins 161,426 

Salt 1,462,246 

"Wood-screws 687,296 

Silk 1,211,577 

Soap 3,971,253 

Steam-engines 3,179,781 

Sugar,  brown  and  refined 11,818,343 

Thread  and  twine 2,014,243 

Turpentine,  spirits  of 1,097,247 

It  has  been  estimated  that  after  the  amendatory  Act 
of  March  7,  1865,  the  government  levied  and  collected 
from  eight  to  fifteen  per  cent  upon  the  cost  of  nearly 
all  manufactured  products,  while  in  some  instances  as 
high  as  twenty  per  cent  was  collected.  In  the  case  of 
books,  pamphlets,  etc.,  it  has  been  computed  that  the 
reader  paid  from  twelve  to  fourteen  distinct  taxes,  in- 
cluding the  license  tax.  Upon  all  cotton  goods  the 
accumulated  duty  ranged  from  nine  to  fourteen  per  cent, 
while  in  the  case  of  sugar  the  rates  were  about  equal 
to  the  entire  labor  cost  of  its  production. 


172  THE  INTERNAL    REVENUE  SYSTEM. 

A.     The  Excise  and  Prices. 

This  continued  duplication  of  duties  contributed 
greatly  to  the  rise  in  prices  which  characterized  the 
period,  as  every  increment  of  cost  due  to  taxation  was 
at  once  shifted  to  the  price  of  the  commodity,  often 
with  an  additional  profit  upon  the  capital  advanced  by 
the  payer  of  the  tax.  Moreover,  every  jobber,  broker, 
retailer,  and  middleman  contributed  an  additional  li- 
cense tax  for  the  privilege  of  carrying  on  his  business, 
which  eventually  was  extracted  from  the  pocket  of  the 
consumer.  It  is  this  cumulative  tendency  of  all  indirect 
taxes  which  renders  them  so  objectionable. 

A  still  further  disturbing  element  in  commercial  cir- 
cles was  the  wide-spread  spirit  of  speculation  which 
prevailed,  a  spirit  largely  induced  by  the  excise.  Man- 
ufacturers and  dealers  often  took  advantage  of  the  gen- 
eral ignorance  of  the  market,  and,  by  anticipating  the 
action  of  Congress,  reaped  large  profits  by  the  accumu- 
lation of  goods  upon  which  a  low  rate  of  duty  had  been 
paid.  Precise  calculations  in  trade  and  industry  were 
also  rendered  impossible  by  the  constant  tinkerings  with 
the  duties,  for  it  was  impossible  to  tell  from  month  to 
month  just  what  the  tax  upon  any  particular  commodity 
would  be.  That  this  very  uncertainty  was  not  infre- 
quently a  source  of  profit  to  the  manufacturers  is  proven 
by  the  fact  that  they  often  urged  an  increase  in  the 
rate  upon  those  articles  which  they  produced. 

It  is  recognized  that  the  study  of  prices  is  most 
intricate,  and  any  conclusions  indicative  of  causal  rela- 
tions is  little  more  than  conjectural.  Especially  true  is 
this  of  the  period  now  under  consideration,  for  the  ele- 


INDIRECT   TAXES    UPON   CONSUMPTION.     173 

ments  which  enter  in  are  both  numerous  and  conflict- 
ing. The  increase  in  the  tariff  rates  doubtless  gave  a 
stimulus  to  industry,  and  inaugurated  an  era  of  good 
times  accompanied  by  rising  prices ;  while  little  less 
influential  was  the  unusual  demand  by  the  government 
for  certain  articles  of  war  consumption.  Either  of  these 
forces,  independently  of  others,  would  have  tended  to 
raise  prices ;  and  to  them  must  be  added  the  currency 
expansion,  which  is  generally  supposed  to  have  been 
mainly  responsible  for  the  inflation  which  characterized 
the  time.  Secretary  McCulloch  advanced  this  opinion 
in  his  report  for  the  year  1865,  where  he  says,  "  On 
the  30th  of  April  last  .  .  .  the  circulation,  bank  and 
national,  had  reached  the  startling  amount  of  $700,000,- 
000.  Nothing  beyond  this  statement  is  required  to  ex- 
hibit the  present  inflation,  or  to  explain  the  causes  of 
the  current  and  advancing  prices."  * 

As  a  matter  of  fact,  the  active  circulation,  at  the  time 
the  secretary  wrote,  was  but  little  more  than  two-thirds 
what  he  estimated  it  to  be ; 2  and  this  fact,  as  well  as 
others,  has  led  some  writers  to  discredit  somewhat  the 
importance  usually  assigned  to  this  cause.3 

Such  an  opinion  was  advanced  at  the  time  by  Mr. 
Wells,  who  asserted,  after  a  careful  investigation  of  the 

1  Report  on  Finances,  1865,  p.  11. 

2  According  to  the  report  of  the  Comptroller  of  the  Currency  for 
that  year,  the  circulation  was  but  $400,814,229,  the  remaining  $250,- 
000,000  included  in  the  secretary's  estimate  being  at  that  time  stored 
in  the  U.  S.  Treasury  vaults,  or  held  by  the  banks  as  reserves  for 
their  deposits  or  circulation.     Ibid.,  p.  G4. 

s  Mr.  Gibbons  ("  U.  S.  Debt,  Finance,  and  Taxation,"  p.  22G)  has 
denied  to  the  currency  any  potency  in  this  matter  at  all,  and  supports 
his  position  by  showing  that  the  inflation  of  prices  and  currency  were 
not  concurrent,  but  rather  the  reverse  of  it. 


174  THE  INTERNAL   REVENUE   SYSTEM. 

whole  subject,  that,  while  the  unhealthy  influence  of  a 
redundant  currency,  as  well  as  the  scarcity  of  labor,  was 
to  be  recognized,  still,  that  "  perhaps  the  most  influen- 
tial "  of  all  the  causes  to  which  the  inflation  of  prices 
was  attributable  was  the  "  extent  of  the  burden  of 
national  taxation ;  "  1  while  the  Kevenue  Commission  of 
1866,  of  which  he  was  the  chairman,  maintained  that 
it  was  "useless  to  talk  of  reducing  prices  to  anything 
like  their  former  level  by  a  reduction  or  contraction  of 
the  currency." 

As  materially  contributing  to  this  hypothesis,  is  the 
burden  of  taxes  sustained  at  that  time.  For  the  fiscal 
year  ending  June  30,  1866,  the  receipts  from  internal 
sources  alone  amounted  to  $310,906,984,  while  the  total 
revenues,  estimated  in  currency,  withdrawn  from  the 
channels  of  trade,  were  $561,572,266.  Assuming  that 
the  population  of  the  country  was  thirty-five  millions, 
this  was  equivalent  to  a  per  capita  tax  of  $16.04,  or 
something  like  eighty  dollars  upon  the  head  of  every 
family ;  while,  on  the  assumption  that  the  value  of  the 
real  and  personal  property  had  neither  increased  nor 
diminished  since  the  census  of  1860,  the  general  rate  of 
taxation  upon  all  tangible  wealth  was  something  over 
3.90  per  cent.2  This  statement  of  the  burden  of  taxa- 
tion borne  is,  of  itself,  sufficient  to  explain,  in  part  at 
least,   the  inflation  of   prices  which   characterized  the 

period. 

B.     The   Excise  and  the  Wage-Earner. 

It  has  often  been  asserted  that  labor  bore  the  cost  of 
the  war.    Of  a  certainty,  the  wage-earner  is  the  greatest 

1  Report  of  Special  Commissioner  of  Revenue,  1866,  p.  26. 

2  Ibid.,  p.  27. 


INDIRECT   TAXES    UPON  CONSUMPTION.     175 

sufferer  upon  the  inauguration  of  a  heavy  excise.  The 
effects  of  excessive  borrowing  upon  industry  and  labor, 
by  which  capital  is  diverted  from  the  natural  channels 
of  trade  and  turned  into  the  coffers  of  the  state,  has 
been  ably  exhibited  by  Professor  Adams.1  Similar 
results  follow  to  an  even  greater  degree  upon  any  ex- 
cessive resort  to  taxation ;  for  in  the  latter  case  the 
wage-earner  suffers  not  only  from  the  intensified  efforts 
of  capital  to  recoup  itself  for  the  inroads  of  the  state, 
but  also  from  the  enhancement  of  prices  which  results 
therefrom. 

So  much  as  is  true  of  that  principle  of  political  econ- 
omy which  asserts  that  capital  sets  the  limit  to  industry, 
is  applicable  to  the  phenomena  now  under  discussion. 
Increase  or  diminish  this  sum,  and,  other  things  being 
equal,  you  increase  or  diminish  the  demand  for  labor. 
Unquestionably  the  excise  had  this  latter  effect;  for  it 
demanded  from  active  capital  invested  in  productive 
enterprises  a  share  of  its  product,  which  it  proceeded 
to  dissipate  in  unproductive  consumption.  The  fact 
that  the  government  disbursed  with  one  hand  what  it 
assumed  with  the  other,  does  not  alleviate  the  general 
effect  of  the  taking;  for  the  capital  usually  perished 
with  the  using,  or  was  so  expended  that  it  only  returned 
to  productive  pursuits  through  a  very  circuitous  process. 
Moreover,  not  infrequently  the  excise  was  so  excessive 
as  to  cause  a  temporary  suspension  of  certain  forms  of 
business,  thus  further  curtailing  the  capital  fund  of  the 
country,  and  consequently  the  demand  for  labor. 

During  the  six  years'  duration  of  the  extraordinary 
taxes,  the  total  amount  of  capital  exacted  from  internal 
i  "  Public  Debts,"  p.  73. 


176  THE  INTERNAL   REVENUE  SYSTEM. 

sources  by  loans  and  taxation  approximated  six  thousand 
million  dollars,  of  which  amount  over  forty-six  hundred 
millions  was  obtained  from  the  sale  of  public  securi- 
ties and  treasury  notes,  and  twelve  hundred  millions 
from  currently  created  wealth  through  the  medium  of 
taxation.  Beyond  controversy,  such  an  incursion  into 
the  capital  fund  of  the  country  must  have  diminished 
the  sum  devoted  to  productive  pursuits,  as  well  as  the 
demand  for  labor.  But  this  reduction  of  the  capital 
fund,  as  well  as  the  consequent  diminished  demand  for 
labor,  but  inadequately  represents  the  full  effect  of 
any  system  of  inland  taxation  which  rests  upon  man- 
ufactures and  consumable  commodities.  The  capital 
fund  might  be  constantly  undergoing  depletion,  yet  be 
continually  recruited  from  other  sources,  and  the  wage- 
earner  be  unaffected  thereby.  Such  is  not  the  case, 
however,  when  prices  are  affected  as  they  were  during 
this  period. 

As  we  have  seen,  prices  were  rendered  very  capricious 
by  the  duplication  which  the  excise  engendered,  rising 
out  of  all  proportion  to  the  amount  returned  to  the  state. 
It  is  perfectly  apparent  that,  so  long  as  all  prices  rise 
in  a  similar  ratio,  or  at  a  like  rate,  no  one  will  suffer,1 
as  the  equilibrium  of  exchange  is  undisturbed.  If  a 
disparity  occur,  however,  then  those  which  rise  the 
least  or  at  the  slowest  rate,  are  at  a  relative  disadvan- 
tage, inasmuch  as  the  depreciated  commodity  will  not 
command  as  much  in  the  market  as  it  formerly  did. 
For  this  reason  labor  is  at  a  disadvantage  in  any  indus- 
trial disturbance,  for  it  is  the  quite  universal  testimony 

1  Exception  is,  of  course,  to  be  made  of  certain  classes  of  vested 
interests,  and  deferred  payments. 


INDIRECT   TAXES    UPON   CONSUMPTION.     177 

of  experience  that  rising  prices  find  their  way  into  al- 
most every  other  form  of  wealth  before  wages  are 
affected.  It  makes  little  difference  whether  the  dis- 
turbance arises  from  a  disordered  currency,  or  unusual 
demands  through  taxation,  upon  a  rising  market  wages 
are  among  the  last  and  the  slowest  to  move.  Anything 
which  causes  a  general  rise  in  prices,  therefore,  is  detri- 
mental to  the  wage-earning  classes ;  for  real  wages  are 
always  temporarily  lowered  thereby,  and  possibly  per- 
manently, if  the  laborer  is  willing  to  sink  below  his 
customary  standard  of  living.1 

An  examination  of  the  phenomena  which  characterize 
the  period  renders  it  possible  to  demonstrate  this  in- 
fluence, which  is  corroborated  by  the  records  of  nearly 
all  great  industrial  disturbances,  by  statistical  proof. 
At  the  close  of  the  war,  Mr.  David  A.  Wells,  as 
Special  Commissioner  of  Revenue,  devoted  himself  for 
some  time  to  an  investigation  of  the  subject  of  prices 
during  this  period,  and  the  causes  to  which  their  varia- 
tions were  attributable;  and  from  the  data  which  he 
secured  from  all  sections  of  the  Northern  States,  it  ap- 
pears that  the  advance  in  prices  during  these  years,  as 
compared  with  the  year  immediately  preceding  the  war 
(1860)  was  in  groceries  and  provisions,  90  to  100  per 
cent;  in  domestic  dry  goods,  including  clothing,  86  per 
cent;  in  fuel,  50  to  60  per  cent;  in  house-rent,  in  the 

1  "According  to  all  experience,  whether  within  modern  observa- 
tion or  recorded  in  history,  it  may  he  laid  down  as  an  established 
maxim  that  labor  is  the  last  of  the  objects  of  exchange  to  rise  in  con- 
sequence of  dearth  or  depreciation,  and  that  commonly  the  price  of 
labor  is  the  last  to  fall  in  consequence  of  increased  abundance  of  com- 
modities or  increased  value  of  money."  —  Tooke's  History  of  Pi-ices 
vol.  i.,  p.  71. 


178  THE   INTERNAL   REVENUE   SYSTEM. 

cities,  90  to  100  per  cent,  and  in  the  country  somewhat 
less.  The  increase  in  the  price  of  a  barrel  of  flour 
from  1860  to  1868,  throughout  the  Eastern  manufactur- 
ing States,  was  in  excess  of  90  per  cent ;  of  salt,  from 
100  to  150  per  cent ;  of  butter,  100  per  cent ;  of  brown 
sugar,  70  to  80  per  cent,  etc.  In  respect  to  ordinary 
cotton  goods,  the  advance,  even  as  late  as  October,  1866, 
was,  in  currency,  172  per  cent  over  the  gold  prices  of 
similar  fabrics  in  July,  1860  ;  of  woollen  goods,  53  per 
cent;  and  of  silk,  about  100  per  cent. 

The  general  advance  in  wages  during  the  correspond- 
ing period  was  generally  as  follows  :  for  unskilled  labor, 
50  per  cent ;  for  skilled  mechanical  labor,  60  to  75  per 
cent.  In  the  cotton-mills  of  New  England  the  advance 
in  the  prices  paid  to  female  adults  working  by  the  piece 
was  50  per  cent ;  of  male  adults,  ditto.1  In  general,  the 
effect  of  the  agencies  growing  out  of  the  war  was  to 
raise  prices  about  90  per  cent,  while  the  corresponding 
advance  in  wages  was  not  in  excess  of  60  per  cent.2 

Elsewhere  we  have  seen  that  Mr.  Wells  considered 
the  excise  to  have  been  one  of  the  chief  agencies,  if  not 
the  chief,  to  which  this  inflation  of  prices  was  to  be  attrib- 
uted, and  hence  one  of  the  means  for  raising  the  cost  of 
living  of  the  laborer,  and  the  reduction  of  his  standard 
of  life.  The  taxes  were  in  great  part  coerced  wages  in 
the  form  of  diminished  consumption  of  clothing,  boots, 
food,  etc.,  which  the  wage-earner  was  able  to  command 
as  the  fruits  of  his  earnings. 

Were  it  necessary  to  substantiate  the  testimony  of 
these  statistics  of  prices  and  wages,  it  is  to  be  found  in 

i  "  Cobden  Club  Essays,"  1871,  p.  481. 

2  Report  of  Special  Commissioner  of  Revenue,  18G6,  p.  14. 


INDIRECT   TAXES    UPON  CONSUMPTION.     179 

the  evidences  of  curtailed  consumption  which  character- 
ize the  period,  and  which  contribute  to  corroborate  the 
theory  that  taxation  may  be  a  significant  force  in  deter- 
mining the  plane  of  life  of  a  people.  During  the  years 
coincident  with  the  war  the  natural  increase  in  the  pop- 
ulation of  the  loyal  States  was  approximately  four  mil- 
lion souls,  but  the  statistics  of  consumption  for  the 
same  years  show  a  constant  and  marked  falling  off  in 
the  demand  for  the  staple  necessities  of  life.  Of  cotton, 
for  example,  the  home  demand  fell  off  from  978,043 
bales  in  1860  to  554,400  bales  in  1865 ;  of  coffee  the 
consumption  during  the  years  from  1855  to  1861  was 
548,000  tons,  which  declined  during  the  next  six  years 
to  somewhat  over  one-half  that  amount.  Sugar  demand 
fell  off  in  a  like  manner  nearly  fifty  per  cent ;  while  in 
textiles,  boots,  shoes,  and  the  like,  the  same  diminution 
in  consumption  was  apparent.1 

From  this  it  will  be  seen  that  consumption  was  ma- 
terially decreased  during  this  period ;  and  while  to  the 
casual  observer  it  might  appear  that  wages  had  increased 
and  the  condition  of  the  laborer  improved,  the  rise  in 
wages  was  merely  an  apparent  one,  for  real  wages,  as 
measured  in  commodities,  had  actually  declined.  In 
order  fully  to  appreciate  this  it  'must  be  remembered 
that  there  are  real  and  nominal  wages.  The  latter  are 
the  apparent  wages  of  labor,  represented  by  the  cur- 
rency of  the  country,  while  the  former  are  determined 
by  the  standard  of  living  of  the  consumer. 

As  the  statistics  indicate,  nominal  wages  do  not  rise 
or  fall  concurrently  with  the  rise  or  fall  of  prices. 
The  pi-ice  of  labor  is  always  less  susceptible  to  the 
1  David  A.  Wells,  in  "  Cobden  Club  Essays,"  1871,  p.  482. 


180  THE  INTERNAL   REVENUE  SYSTEM. 

sudden  influences  of  artificial  causes  than  those  of  com- 
modities, and  the  reasons  are  not  far  to  seek.  The 
manufacturer,  producer,  or  merchant  is  able  to  foresee 
the  change,  and  can  put  up  the  price  in  anticipation  of 
its  arrival.  Such  is  not  the  case  with  the  wage-earners. 
They,  like  society,  move  as  a  mass,  by  a  slow  growth  of 
consciousness.  Labor  is,  moreover,  more  ignorant  and 
more  at  the  mercy  of  the  moment,  and  has  neither  the 
ability  nor  the  knowledge  to  anticipate  and  protect  itself 
from  the  change  which  has  taken  place  in  other  articles. 
Upon  learning  that  the  prices  of  other  articles  have 
advanced,  the  wage-earner  does  not  immediately  put 
up  its  price,  because  the  inertia  of  the  market  is  too 
great  to  be  at  once  overcome.  It  is  not  until  the  full 
force  of  the  movement  reaches  him,  and  he,  as  a  class, 
finds  that  his  nominal  wages  have  lost  purchasing  power, 
and  fail  to  secure  for  him  what,  according  to  his  estab- 
lished habits,  he  has  become  accustomed  to,  that  he 
begins  to  insist  upon  an  increase  in  his  wage. 

But  while  they  are  slow  to  move,  wages  do  follow  the 
market  price  of  commodities  in  a  rough  kind  of  a  way  ; 
and  as  a  sort  of  compensation,  and  this  tends  to  allevi- 
ate the  hardness  of  the  burdens  which  the  period  km 
posed,  labor  is  very  reluctant  to  submit  to  a  reduction 
again  when  prices  resume  their  normal  level.1 

i  "  In  the  previous  report  of  the  commissioner  it  was  proved,  that 
while  up  to  the  commencement  of  the  year  1867  the  average  advance 
of  commodities  was  about  90  per  cent,  that  of  wages  was  not  in  ex- 
cess of  60  per  cent.  Now,  however,  the  case  is  being  entirely  reversed  ; 
commodities  have  fallen  so  much  more  rapidly  that  the  purchasing 
power  of  wages,  even  when  reduced,  is  probably  greater  at  the  pres- 
ent time  than  when  they  had  attained  their  maximum."  —  Report  of 
Special  Commissioner  of  Revenue,  1868,  p.  30. 


INDIRECT   TAXES    UPON  CONSUMPTION.     181 

Further  evidence  is  hardly  necessary  to  demonstrate 
the  effect  of  the  inauguration  of  a  new  system  of  taxa- 
tion imposed  upon  the  staple  necessities  of  life,  upon 
consumption,  or  the  grievousness  of  a  heavy  excise 
upon  those  dependent  for  support  upon  fixed  incomes  or 
their  daily  toil.  Such  a  system,  if  as  excessive  and 
universal  as  that  imposed  during  the  Avar,  is  unjust  and 
discriminating ;  since  it  enforces  unequal  sacrifices  upon 
contributors,  and  enables  one  class  to  enrich  itself  at  the 
expense  of  the  more  dependent  members  of  the  community. 

C.     The  Excise  and  Industry. 

The  tracing  of  causal  relations  in  trade,  commerce, 
and  industry  is  an  exceedingly  complicated  and  delicate 
task  ;  and  any  attempt  at  exactitude  must  be  acknowl- 
edged to  be  well-nigh  hopeless.  To  single  out  a  partic- 
ular cause,  and  attribute  to  its  influence  the  changing 
phenomena  of  industrial  relations  at  a  time  when  the 
state  was  interfering  with  private  enterprise  on  every 
hand,  and  when  it  was  itself  a  very  considerable  con- 
sumer of  all  forms  of  commodities,  would  lead  to 
unjustifiable  conclusions ;  for  this  was  a  period  pre- 
eminently of  reorganization  in  all  forms  of  trade  and 
industry.  Nothing  was  stable  or  fixed  ;  the  circulation 
of  the  country  was  inflated,  speculation  was  well-nigh 
universal,  and  the  war  induced  many  reckless  undertak- 
ings. The  excise  still  further  complicated  industrial 
relations,  but  the  effects  of  its  influence  differ  according 
to  conditions.  In  some  instances  it  bore  with  a  heavy 
hand,  curtailing  the  productive  power  of  small  concerns, 
in  some  cases  destroying  them  altogether;  in  others  it 
served  as  a  stimulant  to  intensified  production,  while 


182  THE  INTERNAL  REVENUE  SYSTEM. 

not  infrequently  it  operated  to  accelerate  the  spirit  of 
combination  by  segregating  these  smaller  producers. 
Upon  this  latter  class,  it  is  generally  conceded,  the 
taxes  were  very  burdensome ;  and,  in  fact,  an  excise,  if 
heavy,  is  nearly  always  prejudicial  to  small  producers. 
The  duty  advanced  is  hard  to  shift  in  the  first  instance, 
as  the  inertia  of  the  market  resists  any  increase  in 
prices,  and  is  slow  to  respond  to  any  change  in  the  cost 
of  production.  Much  hardship  was  thus  caused  in  the 
early  days  of  the  war,  before  prices  had  become  elastic, 
and  industry  accustomed  to  the  altered  conditions  of 
production.  Moreover,  the  excise  failed  to  take  account 
of  a  losing  business  ;  and,  while  the  period  is  one  of  quite 
general  industrial  activity,  it  Avas  more  or  less  abnormal, 
and  the  records  of  mercantile  mortality  indicate  the 
death-rate  to  have  been  unusually  high.  Many  firms 
produced  for  months  at  a  loss,  as  even  this  course  was 
preferable  to  complete  suspension  ;  and  from  such  indus- 
tries the  license  and  general  excise  duties  were  as  ruth- 
lessly collected  as  from  those  producing  at  a  handsome 
profit.  As  a  representative  case  in  point,  the  Commis- 
sion reported  a  firm  whose  losses  in  business  for  six 
months  were  ninety-six  thousand  dollars,  of  which  sum 
twelve  thousand  dollars  had  been  paid  in  taxes.1  The 
stamp-tax  was  also  so  devised  as  to  give  considerable 
advantage  in  the  form  of  a  discount  to  those  purchasing 
in  large  quantities,  a  discrimination  which  has  been 
held  to  have  been  sufficient,  in  the  case  of  the  match 
industry,  to  concentrate  the  industry  of  the  entire  coun- 
try into  a  few  hands,  who  have  continued  to  monopolize 
the  production  up  to  the  present  day.  In  addition  to 
1  House  Executive  Doc.  No.  34,  Thirty-ninth  Congress,  p.  5. 


INDIRECT   TAXES    UPON   CONSUMPTION.     183 

this,  the  advancement  of  the  tax  was  of  itself  sufficient 
in  many  instances  to  cripple  the  small  manufacturer; 
while  the  larger  capitalist,  ever  alive  to  the  advantages 
of  the  market,  was  able  to  profit  by  the  same,  as  well  as 
the  opportunities  for  evasion.  As  a  matter  of  fact,  all 
the  discriminations  favored  the  large  rather  than  the 
small  producer;  and  the  general  tendency  of  these  dis- 
criminations was  to  force  those  with  the  least  staying 
power  to  the  wall. 

But,  despite  the  burden  of  taxation,  the  ravages  of 
war,  and  the  removal  of  millions  of  men  and  capital 
from  productive  pursuits,  the  prosperity  of  the  country 
seems  not  to  have  been  greatly  checked. 

It  is  doubtful  if  the  country  was  in  any  great  degree 
poorer  at  the  close  of  the  war  than  at  the  beginning ;  the 
explanation  of  which  is  to  be  found  in  the  intensifica- 
tion of  industry  traceable  to  the  stimulating  effect  of 
increased  demand,  and  to  the  incentives  given  to  produc- 
tion by  taxation.  Such  was  the  opinion  of  Mr.  "Wells, 
written  in  1867  :  "  It  is  not  believed,"  said  he,  "  that 
any  great  amount  of  Northern  capital,  accumulated  prior 
to  the  war,  was  used  or  destroyed  during  the  war,  but 
that  the  service  and  commodities  used  were  largely  the 
product  of  the  time."  1 

John  Stuart  Mill  admits  that  a  tax  upon  profits  may 
serve  as  a  fillip  to  industry,  stimulating  to  intensified 
production,  and  the  discovery  and  introduction  of  im- 
proved methods,  which  tend  to  cheapen  production  with- 
out depleting  the  income  of  the  manufacturer.  All 
acknowledge  this  to  have  been  a  period  of  great  appar- 
ent prosperity.  Industry  sprang  full  grown  into  life, 
1  Report  of  Special  Commissioner  of  Revenue,  1867,  p.  19. 


184  THE  INTERNAL   REVENUE  SYSTEM. 

fortunes  were  rapidly  acquired,  "while  labor  found  a 
ready  market  for  its  activity.  On  the  other  hand,  con- 
sumption of  staples  in  time  of  war  is  not  likely  to 
equal  that  of  peace.  There  are  no  more  mouths  to  feed 
nor  backs  to  cover.  At  the  same  time  enforced  economy 
is  likely  to  diminish  demand  for  many  articles,  the 
only  increase  in  consumption  lying  in  the  field  of  muni- 
tions and  appliances  of  war.  Experience  seems  to  prove 
also  that  production  does  not  suffer  any  great  check, 
either  through  the  transfer  of  labor  to  military  service, 
or  through  moderate  demands  of  the  taxing  power.  The 
productive  power  of  the  country  may,  in  fact,  be  in- 
creased. The  farmer,  for  instance,  will  not  permit  his 
fields  to  lie  idle  because  one  of  his  sons  has  entered 
some  other  pursuit,  nor  will  the  capitalist  allow  the 
wheels  of  industry  to  rust  because  the  state  has  assumed 
a  portion  of  the  produce.  So  long  as  a  market  remains, 
each  will  seek  to  compensate  himself  for  the  loss  which 
he  has  endured.  Either  remaining  labor  will  intensify 
its  exertions,  or  ingenious  contrivances  will  be  devised  to 
supply  the  depletions  of  labor,  or  to  compensate  for  the 
exactions  of  the  tax-gatherer.  That  these  phenomena 
characterized  the  period  now  under  discussion  is  too  well 
known  to  require  proof.  A  brief  glance,  however,  at  the 
statistics  of  the  patent  office  for  these  years  may  demon- 
strate somewhat  more  graphically  that  such  tendencies 
were  really  operative.  The  total  number  of  patents  is- 
sued during  the  years  extending  from  1861  to  1866,  as 
well  as  the  total  taxes  collected,  were  as  follows :  — 


PATENTS 

INTERNAL 

TATENT8 

INTERNAL 

GRANTED. 

REVENUE. 

GRANTED. 

REVENUE. 

1861      3340 

1864      4637 

$110,210,000 

1862      3521 

$    1,790,000 

1865      6220 

210,660,000 

1863      3780 

39,120,000 

1866      9100 

311,200,000 

INDIRECT   TAXES    UPON   CONSUMPTION.     185 

From  this  it  will  be  seen  that  the  number  of  patents 
issued  varied  in  a  ratio  corresponding  somewhat  roughly 
with  the  amounts  derived  from  internal  taxation,  in- 
creasing but  slightly  up  to  1863,  but  from  that  time 
on  growing  at  a  rapid  rate.  Such  a  coincidence  would 
seem  to  -indicate  some  relation  existing  between  them. 
In  agriculture  the  development  of  labor-saving  machin- 
ery ^was  phenomenal,  and  is  attributable,  in  part  at  least, 
to  the  drain  on  the  rural  laboring  classes  for  recruiting 
the  army ;  but  in  industry  the  same  scarcity  of  laborers 
was  not  so  marked,  and  the  cause  for  the  unprecedented 
development  of  labor-saving  machinery  is  found  in  the 
desire  of  the  manufacturer  to  indemnify  himself  for 
the  inroads  made  upon  his  capital  and  income  by  the 
state. 

It  is  true  that  many  industrial  establishments  were 
checked,  some  even  destroyed,  by  the  excise.  These 
were  the  marginal  producers,  the  no-rent  "  entrepre- 
neurs" whose  elimination  from  the  field  of  competition 
gave  those  remaining  an  additional  stimulus  for  exer- 
tion. A  glance  at  the  change  which  the  period  wrought 
in  the  textile  industries  of  New  England,  as  well  as  in 
the  iron  and  steel  business  of  Pennsylvania,  which  dur- 
ing these  years  of  disordered  trade  conditions  were  run- 
ning full  hands,  proves  that  wealth  was  being  produced 
at  a  rapid  rate,  and  that  the  country  was  not  being 
impoverished  by  the  demands  of  war. 

P.      Conclusion. 
To  reach  any  proper  estimate  of  the  vast  and  com- 
plicated   fiscal    system    which    we    have    been    consid- 
ering in  the  last  four  chapters,  it  is  necessary  to  take 


18G  THE  INTERNAL   REVENUE  SYSTEM. 

cognizance  of  the  fact  that  the  excise  was  the  prod- 
uct of  extraordinary  conditions ;  as  in  all  our  periods 
of  financial  change  a  gigantic  war  formed  the  back- 
ground, demanding  contributions  so  unusual  as  to  set 
exact,  or  even  approximate,  justice  at  defiance.  The 
imperative  necessities  of  the  occasion  precluded  a  care- 
ful and  scientific  study  of  the  consequences  and  burdens 
of  the  taxes  provided  for,  and,  even  were  it  possible, 
under  the  most  favorable  circumstances,  to  determine 
with  precision  the  incidence  of  taxation  in  general  or 
of  each  tax  in  particular ;  if  one  could  determine  to 
what  degree  each  tax  was  susceptible  of  being  charged 
to  a  particular  class,  or  upon  a  particular  commodity, 
trade,  or  business ;  if  one  could  determine  consequently 
upon  whom  it  is  socially  the  most  legitimate  to  cause 
the  public  burdens  to  fall,  —  even  were  such  problems 
as  these  susceptible  of  exact  scientific  determination,  as 
they  are  not,  it  is  hardly  to  be  expected  that  Congress, 
with  no  special  knowledge  of  the  principles  of  finance, 
with  no  precedents  for  guidance,  and  with  little  statis- 
tical data  of  manufactures  or  commerce,  should  have 
been  able  to  solve  "the  art  of  plucking  the  fowl  with- 
out making  it  cry  out." 

In  view  of  all  these  circumstances,  our  amazement  is 
not  so  much  that  so  many  social,  moral,  and  industrial 
ills  should  have  followed  in  the  trail  of  the  fiscal  legis- 
lation of  the  period,  but  rather  that  any  nation  could 
have  sustained  the  withdrawal  of  business  capital  to 
the  amount  of  $4,660,000,000  by  loans  and  treasury 
notes,  of  $666,000,000  by  internal  taxation,  and  $525,- 
000,000  by  customs  duties,  without  being  well-nigh  pros- 
trated thereby.     Yet  such  was  the  experience  of  this 


INDIRECT   TAXES    UPON   CONSUMPTION.     187 

country  during  the  years  extending  from  1861  to  1866 ; 
but  so  elastic  was  industry,  and  so  versatile  the  ingenu- 
ity of  the  people,  that  the  burden,  though  appreciable, 
scarcely  checked  the  onward  inarch  of  the  country's 
prosperity. 

The  early  policy  of  the  Administration  was  to  leave 
industry  untouched,  and  to  rely  in  great  measure  upon 
the  proceeds  of  loans  and  treasury  notes.  A  similar 
misplaced  confidence  in  the  customs  revenue  and  credit 
of  the  country  had  brought  the  administrations  of  Gal- 
latin and  Campbell  to  the  brink  of  insolvency  in  1814, 
and  Secretary  Chase  did  not  escape  a  like  fate.  It  is 
hardly  too  much  to  state  that,  had  the  machinery  for 
immediately  realizing  on  the  currently  created  wealth 
of  the  country  existed  at  the  outbreak  of  the  war,  the 
receipts  from  such  internal  sources  as  the  income  tax, 
license,  stamp,  spirit,  and  tobacco  duties  might  have 
been  rendered  immediately  productive  of  $100,000,000, 
a  resort  to  treasury  notes  might  have  been  averted,  and 
the  war  been  brought  to  a  more  speedy  termination. 

Moreover,  when  Congress  did  take  the  matter  seri- 
ously in  hand,  its  action  was  such  that  the  consumer 
was  frequently  unnecessarily  oppressed,  while  the  Treas- 
ury received  the  minimum  of  return  from  the  maximum 
of  effort.  And  the  general  excise  upon  consumable 
commodities,  other  than  spirits  and  tobacco,  was  in  the 
main  responsible  for  the  evils  which  resulted.  It  was 
to  the  influence  of  these  taxes  that  much  of  the  specu- 
lation, uncertainty,  and  business  disaster  which  marked 
the  period  was  attributable.  They  induced  an  undue 
enhancement  of  prices;  they  took  from  the  pockets  of 
the  payer  much  more  than  ever  reached  the  Treasury. 


188  THE  INTERNAL   REVENUE  SYSTEM. 

Wages  were  affected  by  them,  both  in  the  diminution 
of  active  capital  devoted  to  business,  but  much  more 
by  the  increase  in  the  cost  of  living  which  ensued.  At 
the  same  time  the  excise,  together  with  the  tariff,  gave 
to  all  industry  an  artificiality  and  instability  which 
became  manifest  in  the  great  number  of  commercial 
failures  which  followed  in  the  wake  of  the  war. 
Small  establishments  were  forced  into  liquidation  or 
concentration  with  other  concerns,  while  many  others, 
by  inequalities  of  the  tariff  and  internal  taxes,  ceased 
producing.  In  general,  commercial  conditions  were  in 
a  state  of  great  instability,  and  continued  so  for  many 
years  subsequent  to  the  close  of  the  war. 

But  the  defence  of  the  general  excise   on  manufac- 
tures was  that  it  was  productive.     Not  immediately  as 
fruitful  as  Mr.  Morrill  had  anticipated  in  1862,  when 
he  estimated  its  productivity  at  $75,000,000,  but  still  so 
important  as  to  form  34. 61  per  cent  of  the  total  receipts 
during  the  five  years  of  its  continuance,  from  1863  to 
1868.    Obviously,  to  have  deprived  the  Treasury  of  this 
important  source  of  revenue  would  have  caused  serious 
embarrassment.     And  it  is  doubtful  if  the  financial  sup- 
port necessary  for  the  conduct  of  the  war  could  have 
been  secured,  save  at  great  sacrifice,  without  the  aid  of 
these  taxes,  baneful  as  they  were  in  their  effects.     Even 
before  their   imposition  the  credit   of  the  country  had 
been  strained  to  the  utmost  to  meet  the  demands  placed 
upon  it.     A  further  dependence  upon  loans  was  appar- 
ently out  of  the  question.     The  only  other  alternative 
lay  in  the  discovery  of  new  sources,  or  other  means  of 
realizing  upon  currently  created  wealth  through  other 
forms  of  internal  or  customs  taxes.     But   already  the 


INDIRECT  TAXES    UPON  CONSUMPTION.     189 

customs  rates  were  well-nigh  prohibitive,  and  the  only 
escape  from  the  general  excise,  with  its  many  imper- 
fections and  evils,  lay  in  some  such  concrete  system  of 
inland  taxation  as  the  Commission  suggested  for  the 
reorganization  of  the  finances  at  the  close  of  the  war. 
This  contemplated  a  concentration  upon  incomes,  lux- 
uries, stamps,  licenses,  and  some  of  the  other  less  objec- 
tionable forms  of  revenue,  which  would  have  relieved 
the  country  from  the  burdens  of  the  tax  upon  manufac- 
tures and  products.  But  the  rates  upon  these  subjects 
were  already  as  high  as  they  would  bear,  and  any  at- 
tempt to  increase  the  rates  would  have  resulted  in  evils 
and  complications  greater  than  those  sought  to  be 
avoided.  And  had  such  a  concrete  system  been  de- 
pended on  without  some  such  change  of  rates,  the  Treas- 
ury would  have  been  deprived  of  $36,222,716  in  1864, 
of  $73,318,450  in  1865,  and  of  $127,230,608  in  1866 
(the  collections  from  manufactures  and  products),  or  31, 
35,  and  41  per  cent  of  the  total  receipts  from  internal 
sources  during  these  critical  years. 

To  suppose  that  these  collections  could  have  been  ren- 
dered good  by  a  further  resort  to  the  income  tax  and  an 
increase  in  the  duties  upon  distilled  and  malt  liquors, 
tobacco,  stamps,  and  licenses,  which,  as  has  been  shown, 
were  already  taxed  at  an  almost  prohibitive  rate,  is  un- 
tenable ;  and  we  are  forced  to  conclude  that  public  policy 
justified  measures  which  seem  to  have  been  as  inimical 
to  the  material  interests  of  the  country  as  any  that  could 
have  been  devised. 

The  experiences  here  described  are  further  instruc- 
tive, in  the  highest  degree,  of  the  practical  limits  set  by 
nature  to  the  power  of  government  to  derive  revenues 


190  THE   INTERNAL   REVENUE   SYSTEM. 

by  taxation.  A  government  may  be  loath  to  admit  its 
inability  to  cope  with  the  ingenuity  and  cupidity  of 
private  interests,  and  to  acknowledge  its  incompetency 
to  collect  any  rate  of  taxation  which  it  may  choose  to 
impose ;  but  the  experience  above  recorded  proves  most 
conclusively  that  a  fiscal  system,  to  be  efficient,  must  not 
contravene  the  principles  of  human  nature,  or  place  too 
great  a  strain  upon  official  integrity,  or  too  high  a  pre- 
mium upon  dishonesty  ;  and  that  a  government  which 
disregards  this  elementary  principle,  not  only  cheats 
itself,  but  tends  to  degrade  the  standard  of  public 
honesty  and  probity.  Moreover,  nothing  displays  the 
boundless  resources  of  the  nation  more  strongly  than 
the  ability  with  which  the  people  accepted  and  bore  a 
system  of  taxation  almost  unparalleled  in  its  univer- 
sality and  in  the  rates  which  it  imposed. 

We  have  seen  the  internal  revenue  system,  however, 
in  its  worst  light.  Later  modifications  have  brought 
the  system  into  such  universal  favor  that  to-day  it  is 
opposed  only  upon  political  or  sentimental  grounds. 
Fraud  and  evasion  have  been  reduced  to  a  minimum, 
while  the  objection  formerly  advanced  with  so  much 
effect,  namely,  that  it  interfered  with  individual  liberty, 
has  disappeared  before  the  advancing  sense  of  the  peo- 
ple. The  cost  of  collection  has  further  been  so  reduced 
that  the  excise  has  become  the  cheapest  of  taxes. 
Moreover,  as  it  now  exists,  and  under  ordinary  condi- 
tions, the  charge  of  inquisitorialness  cannot  be  applied 
to  it,  although  at  one  time  this  doubtless  constituted  a 
grievance  with  the  people.  But  a  consideration  of  these 
changes  will  be  deferred  to  a  later  chapter. 


ITS  ADMINISTRATION.  191 


CHAPTER   VII. 

THE    ADMINISTRATION    OF    THE    INTERNAL    REVENUE 
SYSTEM. 

A  tax  may  be  theoretically  the  most  just  that  can  be 
devised,  but  in  its  collection  so  fraught  with  difficulties 
and  complications  as  to  render  it  untenable.  It  is  the 
supposed  difficulties  inherent  in  its  administration  that 
have  condemned  the  excise  in  the  past,  for  it  has  been 
supposed  that,  in  addition  to  the  fact  that  it  is  cumula- 
tive, and  requires  a  large  number  of  officials  to  collect 
it,  the  excise  obstructs  industry,  is  a  check  to  its  de- 
velopment by  requiring  a  disclosure  of  processes  and 
methods  of  manufacture,  and  is  thus  inquisitorial  and 
hostile  to  the  spirit  of  a  free  people.  Moreover,  an  ex- 
cise is  said  to  offer  great  opportunities  for  evasion, 
either  by  false  returns  or  by  connivance  with  dishonest 
officials,  and  in  this  way  tends  to  discourage  public 
probity,  and  degrade  the  moral  tone  of  a  people.  Such 
objections  as  these  have  been,  and  are  still,  urged 
against  the  excise  in  foreign  countries,  and  it  was  such 
a  traditional  dislike  in  the  minds  of  the  colonists  of 
English  and  Irish  descent,  with  whom  the  idea  of  an 
excise  was  inseparably  connected  with  the  window  and 
hearth  tax,  that  induced  much  of  the  hostility  against 
its  inauguration  in  this  country  in  the  early  days  of  the 
Republic.  Many  of  these  objections  were  well  founded 
during  the  greatest  extension  of  the  excise ;  but  at  the 


192  THE  INTERNAL   REVENUE  SYSTEM. 

present  time,  with  the  reduction  of  the  number  of  tax- 
able articles  and  the  perfection  of  the  machinery  of 
administration,  such  arguments  have  lost  their  force,  for 
later  changes  have  elevated  the  system  well-nigh  be- 
yond reproach. 

In  administrative  details  the  collection  of  the  tax  has 
undergone  many  changes  since  the  organization  of  the 
department  under  the  law  of  July  1,  1862.  This  meas- 
ure followed  closely  earlier  precedents,  both  in  the  selec- 
tion of  articles  to  be  taxed,  as  well  as  in  prescribing  how 
they  should  be  placed  under  contribution. 

In  1861,  in  harmony  with  the  prevailing  belief  in  the 
early  suppression  of  the  war,  no  provision  was  made  for 
a  permanent  and  independent  bureau  of  internal  rev- 
enue. The  assessment  and  collection  of  the  direct  and 
income  taxes  was  reposed  with  the  Secretary  of  the 
Treasury,  under  whose  direction  was  placed  a  Commis- 
sioner of  Taxes,  whose  duties  were  those  of  preparing 
forms,  and  general  superintendence  of  subordinate  offi- 
cials. But  the  growing  appreciation  of  the  enormity 
of  the  struggle,  and  the  necessity  for  increased  revenues 
from  inland  sources,  led  to  the  creation  of  the  office  of 
Commissioner  of  Internal  Revenue,  whose  duties  were 
mainly  ministerial  and  administrative ;  the  new  official 
being  charged,  under  the  direction  of  the  Secretary  of 
the  Treasury,  with  preparing  all  instructions,  regula- 
tions, directions,  forms,  blanks,  stamps,  licenses,  and 
the  distribution  of  the  same,  as  well  as  all  other  matters 
pertaining  to  the  assessment  and  collection  of  the  tax, 
and  its  general  superintendence.  A  definite  number  of 
deputies  and  assistants  Avas  provided  for,  to  assist  him. 
Along  with  these  were  five,  and  later  ten,  special  agents, 


ITS  ADMINISTRATION.  193 

whose  duty  it  was  to  aid  in  the  prevention  and  detection 
of  frauds,  and  to  look  after  the  general  enforcement  of 
the  law.1 

For  convenience  of  collection,  the  States  and  Terri- 
tories were  divided  into  districts,  varying  in  size  accord- 
ing to  density  of  population  or  other  conditions,  in  each 
one  of  which  a  principal  assessor  and  collector  were 
appointed,  endowed  with  plenary  power  further  to  sub- 
divide their  districts  into  smaller  areas,  in  which  assist- 
ant officers  were  to  be  appointed.2  Certain  small  or 
sparsely  populated  States  comprised  one  district ;  while 
others  more  densely  populated,  as  the  eastern  manu- 
facturing States,  were  divided  into  a  large  number  of 
administrative  districts.  Thus  Xew  York  included  32 
districts,  Pennsylvania  21,  Ohio  19,  Illinois  13,  Indiana 
11,  and  Massachusetts  10. 3  These  districts  were  usually 
coextensive  with  Congressional  districts,  and  could  not 
exceed  them  in  number.  Keturns  were  required  from 
all  persons,  partnerships,  firms,  associations,  or  corpora- 
tions rendered  taxable,  before  the  first  Monday  in  May 
of  each  year,  the  return  to  include  the  amount  of  annual 
income,  the  articles  or  objects  charged  with  a  tax,  the 
quantity  of  goods,  wares,  and  merchandise  made  or  sold, 
and  charged  with  a  specific  or  ad  valorem  duty,  accord- 
ing to  the  forms  as  provided  by  the  Commissioner  of 
Internal  Kevenue.  In  case  of  failure  on  the  part  of  the 
taxable  to  make  such  return,  the  assessor  was  empowered 
to  make  up  the  tax  duplicate  from  the  best  information 

i  Act  of  July  1,  1862. 

2  See  Report  on  Finances,  1867,  p.  266. 

3  Boutwell's  "Direct  and  Excise  System  in  the  United  States," 
1864,  p.  242. 


194  TIIE  INTERNAL   REVENUE  SYSTEM. 

available ;  and,  if  any  person  disclosed  a  false  list  to  the 
official  with  intent  to  evade  payment,  he  was  finable 
in  a  sum  not  exceeding  $500.  In  case  of  refusal  to 
make  return,  the  assessor  was  empowered  to  enter  upon 
the  premises,  and  make  out  a  list  of  taxable  objects, 
and  add  thereto  fifty  per  cent  as  a  penalty  for  refusal. 
If  any  person  objected  to  his  assessment,  the  right  of 
appeal  from  this  decision  of  the  official  was  allowed. 
These  lists,  with  the  taxes  payable  thereon,  were  deliv- 
ered to  the  collector  of  the  district,  who  was  authorized 
to  proceed  with  their  collection ;  and,  if  the  duties  were 
not  paid  within  ten  days  after  such  demand,  he  was 
empowered  to  collect  by  distraint  and  sale  of  the  goods, 
chattels,  and  effects  of  the  delinquent,  and  to  add 
thereto  ten  per  cent  as  a  penalty.  Lists  of  collections 
were  transmitted  monthly  to  the  commissioner,  and  de- 
posits were  made  by  the  collectors,  upon  order  of  the 
commissioner,  in  such  depositaries  as  were  designated 
by  him. 

At  the  organization  of  the  system  the  force  of  offi- 
cials was  unusually  large,  although  even  at  this  time 
the  commissioner  asserted  that  the  number  employed 
did  not  equal  that  of  other  countries  where  similar 
systems  prevailed.1 

From  the  inauguration  of  the  system,  the  adminis- 
tration suffered  seriously  from  the  changes  continually 
made  in  the  personnel  of  the  employees,  which  com- 
pletely neutralized  the  most  zealous  efforts  to  secure 
a  trained  service.  In  1867,  when  the  entire  number  of 
collectors  slightly  exceeded  700,  the  number  of  removals 
for  the  year  was  230 ; 2  while,  of  the  3,100  assessors  and 
i  Report  on  Finances,  1867,  p.  2G8.  2  Ibid.,  p.  207. 


ITS  ADMINISTRATION.  195 

assistants  in  the  service  that  year,  over  one-third  were 
supplanted  by  new  and  untried  appointees.  As  a  very 
natural  result,  inefficiency  and  maladministration  char- 
acterized the  service,  dissipating  the  confidence  of  the 
public,  and  deleteriously  affecting  the  revenues. 

Two  causes  were  in  the  main  responsible  for  this 
result :  one,  the  inadequacy  of  the  remuneration  offered ; 
but  by  far  the  most  potent  cause  was  the  absence  of  a 
merit  system  for  the  determination  of  appointments. 
Probably  no  branch  of  our  national  administration  has 
suffered  so  much  from  the  spoils  system  as  has  the  in- 
ternal revenue  service ;  for  in  no  department  of  the  gov- 
ernment are  efficiency  and  honesty  so  essential  in  the 
employee. 

In  addition  to  the  regular  officials  enumerated  above, 
temporary  assessors  were  engaged  during  the  annual 
assessments,  while  a  small  army  of  detectives  and  in- 
spectors for  the  prevention  of  fraud  were  constantly 
employed.  Plenary  authority  was  granted  all  grades  of 
officials,  and  the  principle  of  personal  responsibility  was 
insisted  on.  Every  subordinate  received  his  commission 
from  his  immediate  superior,  who  directed  his  work, 
required  commensurate  bonds,  and  was  directly  respon- 
sible for  his  acts.1  By  this  means  it  was  hoped  to 
relieve  the  central  administration  of  a  vast  amount  of 
detail  and  minutia,  while  it  was  further  thought  that 
the  numerous  gradations  of  officials  would  serve  as  a 
corrective  of  errors  in  accounting.  That  these  latter 
expectations  were  not  fulfilled,  may  be  inferred  from  a 
treasury  circular  dated  December  29,  1865,  from  which 
it  appears  that,  during  the  preceding  four  months,  over 
1  Report  on  Finances,  1SG7,  p.  266. 


196  THE  INTERNAL   REVENUE  SYSTEM. 

three  hundred  and  sixty-five  errors  had  been  detected  in 
the  returns,  involving  amounts  ranging  from  a  few  cents 
to  sixty  thousand  dollars.  Embezzlement  was  also  more 
or  less  frequent,  but  the  greatest  losses  were  traceable 
to  the  incapacity  and  dishonesty  of  officials  and  to  poor 
assessments.  So  badly  was  the  system  administered,  in 
fact,  during  the  first  two  or  three  years,  that  it  has  been 
estimated  that  less  than  one-third  of  what  was  paid  by 
the  people  passed  into  the  Treasury.1  In  1865,  compe- 
tent authorities  calculated  that  existing  laws  should 
have  produced  $500,000,000,  while,  as  a  matter  of  fact 
less  than  half  that  amount  was  collected. 

Innumerable  cases  might  be  instanced  to  demonstrate 
that  the  extravagance  of  the  war  was  quite  equalled  by 
the  wasteful  and  inefficient  methods  of  administration 
which  prevailed,  evils  which  were  so  flagrant  as  to  cause 
the  entire  system  to  be  viewed  with  suspicion  and  dis- 
trust. The  duties  upon  many  articles  were  so  high  as  to 
stimulate  evasion,  while  the  probability  of  detection  was 
so  unlikely  that  it  failed  to  serve  as  a  deterrent.  Corrupt 
whiskey  rings  influenced  the  appointment  of  men  who 
connived  with  them  in  evading  the  duty,  so  that  distil- 
lers, otherwise  honest,  were  forced  either  to  suspend 
business  or  become  partners  to  the  crime.  As  the  com- 
missioner stated,  "It  requires  a  man  of  tried  integrity  to 
resist  the  flattering  temptation  of  a  corrupt  distiller. 
Ten  thousand  dollars  adroitly  and  wickedly  expended 
may  hide  the  manufacture  of  a  thousand  barrels  of 
wine,  which  would  yield  a  hundred  thousand  dollars  for 
the  public  revenues.  If  an  inspector  has  forgotten  his 
duty  in  a  single  instance,  he  is  in  the  power  of  his  pur- 
1  Commercial  and  Financial  Chronicle,  1870,  p.  711. 


ITS  ADMINISTRATION.  197 

chaser  for  all  subsequent  transactions,  becoming  his 
constant  protector,  and  his  ready  witness  against  the 
government."  1 

During  the  continuance  of  hostilities  but  little  effort 
was  made  to  introduce  the  system  into  the  rebellious 
States.  With  the  triumph  of  the  Union  arms  and  the 
restoration  of  peace  in  the  border  States,  officers  were 
appointed  to  proceed  with  the  collection  of  the  tax ;  and 
it  became  necessary  to  decide  whether  or  not  taxes 
which  had  accrued  prior  to  the  establishment  of  federal 
authority  therein  should  be  collected.  Secretary  Mc- 
Culloch  decided  that  in  view  of  the  non-existence  of 
officers  to  whom  payment  could  have  been  made,  as 
well  as  the  heavy  and  exhausting  burdens  and  ravages  of 
the  war  already  resting  upon  these  States,  that,  without 
waiving  in  any  degree  the  right  of  the  government  in 
respect  to  the  taxes,  the  department  did  not  deem  it 
advisable  to  insist  on  their  payment,  so  far  as  they  were 
payable  prior  to  the  establishment  of  a  collection  district 
embracing  a  territory  in  which  the  tax-payer  resided.2 
For  similar  reasons  the  secretary  was  induced  to  sus- 
pend the  sales  under  the  direct  tax.  In  view  of  these 
facts,  as  well  as  the  grave  difficulties  which  would  arise, 
and  the  interests  which  would  be  invalidated  were  the 
provisions  of  such  taxes  as  the  stamp-duty  insisted  on, 
Secretary  McCulloch  advised  :  — 

First,  that  the  collection  of  all  internal  revenue  taxes 
which  accrued  before  the  establishment  of  revenue  offi- 
cers in  the  Southern  States  be  indefinitely  postponed  ; 
Second,  that  all  sales  of  property  in  those  States  under 
the  direct  tax  be  suspended  until  the  States  should  have 
i  Keport  on  Finances,  1866,  p.  56.  2  Ibid.,  18C5,  p.  29. 


198  THE  INTERNAL   REVENUE  SYSTEM. 

an  opportunity  of  assuming  the  tax ;  Third,  that  all 
transactions  in  such  States,  which  may  be  invalid  by 
the  non-use   of  stamps,  be  legalized.1 

These  recommendations  were  substantially  adopted, 
and  as  rapidly  as  possible  federal  tax-gatherers  were 
appointed,  and  the  system  extended  to  the  reconstructed 
States. 

The  perfection  of  the  details  of  the  service  received, 
but  scant  attention  during  the  war ;  but  with  the  growing 
familiarity  of  officials  with  its  defects  from  the  disclo- 
sures of  the  press,  as  well  as  the  invaluable  investiga- 
tions of  the  Revenue  Commission,  the  importance  of 
administrative  efficiency  became  apparent.  A  careful 
revision  of  so  much  of  the  law  as  related  to  the  manu- 
facture and  assessment  of  distilled  spirits  was  made  at 
the  instance  of  the  Revenue  Commission  in  the  years 
immediately  subsequent  to  the  war,  the  leading  feature 
of  which  was  the  subjection  of  each  distillery  to  the 
direct  surveillance  of  a  government  inspector,  whose 
duty  it  was  to  oversee  the  process  of  manufacture  and 
sale,  and  the  assessment  of  the  duty.  While  the  change 
was  conducive  of  greater  fidelity  on  the  part  of  weighers, 
gaugers  and  other  officials,  and  placed  an  additional 
check  upon  them,  the  powerful  inducements  which  could 
be  offered  by  the  dishonest  distiller  frequently  neutral- 
ized the  effect  of  the  measure ;  and  there  was  no  provis- 
ion for  constant  rotation  of  the  inspectors  from  one  still 
or  district  to  another,  as  was  suggested  by  the  Commis- 
sion, a  provision  which  would  have  greatly  enhanced  the 
efficiency  of  the  law.  But  the  effect  of  this,  as  well  as 
all  other  remedial  efforts  on  the  part  of  Congress,  was 
1  Finance  Report,  1865,  p.  30. 


ITS  ADMINISTRATION.  199 

checked  by  the  dishonesty,  complicacy,  and  inefficiency 
of  officials,  traceable  in  part  at  least  to  the  system  of  ap- 
pointment and  retention  in  office  for  political  service. 

With  the  abatement  of  the  duties,  and  the  decrease 
in  the  number  of  taxable  articles,  the  defects  of  the 
method  of  assessment  were  more  noticeable.  During 
the  war,  stamps  had  proven  a  most  effective  method,  not 
only  as  a  means  of  taxing  acts  and  instruments,  but  also 
certain  classes  of  commodities  as  well.  The  method  was 
simple,  the  returns  easy  of  collection,  and  evasion  well- 
nigh  impossible.  In  1868  2  this  plan  was  extended  to 
tobacco,  malt  and  distilled  liquors,  and  license  duties, 
and  with  some  slight  alterations  remains  the  method  of 
assessing  these  objects  at  the  present  day.  By  this  plan, 
the  stamp,  of  proper  denomination,  is  affixed  to  the 
package  containing  spirits,  beer,  or  tobacco,  with  an  in- 
dication upon  its  face  of  the  quantity  of  the  article 
within.  In  the  case  of  special  license  taxes  a  similar 
stamp  is  required  to  be  prominently  displayed  in  the 
place  of  business.  The  results  of  this  change  were  im- 
mediate and  marked.  Receipts  from  all  sources  showed 
a  quick  response,  while  the  difficulties  of  collection  were 
reduced  to  a  minimum. 

This  reduction  of  the  number  of  taxable  objects,  and 
the  substantial  concentration  of  the  system  upon  luxu- 
ries, banks,  legacies,  and  a  few  commodities,  soon  ren- 
dered possible  still  further  simplification.  Heretofore 
assessments  had  been  made  by  local  officials,  appointed 
in  each  revenue  district.  In  1872  2  the  local  force  was 
abolished  altogether,  and  the  official  force  reduced  by  the 
dismissal  of  228  assessors,  240  clerks,  1,040  assistant 
i  Act  of  July  20,  1868.  2  Act  of  Dec.  24. 


200  THE  INTERNAL   REVENUE  SYSTEM. 

assessors,  their  work  being  centralized  at  the  Treasury 
Department,  and  the  commissioner  authorized  person- 
ally to  make  the  various  inquiries,  determinations,  and 
assessments  of  taxes  which  had  heretofore  been  done 
by  these  local  officials.  Under  this  arrangement  assess- 
ment lists  are  now  made  up  by  the  commissioner,  and 
forwarded  to  the  collectors  of  the  various  districts,  thus 
insuring  greater  uniformity  in  returns.  The  change 
was  most  radical,  but  the  results  proved  equally  aston- 
ishing. In  addition  to  saving  nearly  $2,000,000  annu- 
ally in  the  form  of  salaries  and  expenses,  an  immediate 
increase  in  the  revenues  resulted.  This  was  especially 
noticeable  in  the  case  of  license  taxes  and  those  on 
banks,  an  increase  in  collections  of  half  a  million  accru- 
ing from  the  latter  source  in  1874,  and  of  nearly  ninety 
per  cent  from  the  former.  At  the  same  time *  the  num- 
ber of  revenue  districts  was  reduced  to  eighty ;  but  this 
revision  never  went  into  effect,  although  four  years  later 
the  number  was  reduced  to  one  hundred  and  thirty-one.2 

The  system  of  local  administration,  as  above  de- 
scribed, depended  wholly  on  the  assumption  that  local 
officials  are  honest.  And  where  such  is  the  good  fortune 
of  the  government  the  tax  has  been  uniformly  collected. 

It  would  seem  that  with  the  intricate  system  of 
checks  imposed,  illicit  distillation  would  be  well-nigh 
impossible ;  yet  so  much  more  acute  is  private  activity, 
when  inspired  by  cupidity  and  the  probability  of  great 
gains,  that  these  guards  have,  from  time  to  time,  been 
broken  down.  But  to  do  this  it  was  necessary  to  secure 
the  co-operation  of  both  the  storekeeper  and  the  gauger, 
and  then  to  place  the  spirits  upon  the  market  through 
i  Act  of  June  6,  1872.  2  Act  of  Aug.  15,  1876. 


ITS  ADMINISTRATION.  201 

the  re-use  of  stamps,  or  by  the  co-operation  of  the  rec- 
tifier. 

It  was  by  such  means  as  these  that  the  great  frauds, 
extending  from  1872  to  1875,  were  committed ;  and  so 
strong  were  the  interests  involved,  and  so  inscrutable 
the  means  employed,  that  it  required  the  most  vigorous 
efforts  on  the  part  of  the  government  to  extirpate  the 
ring,  and  bring  the  leaders  to  justice.  The  mania  for 
fraudulent  profits,  so  long  gratified  during  the  war, 
sought  other  avenues  for  gain  at  its  close ;  and  while  the 
reduction  in  the  rates  and  the  changes  in  the  service 
rendered  the  profits  more  precarious  and  the  advantages 
resulting  less  tempting,  still  they  were  sufficient  to  call 
into  being  the  great  whiskey  ring  in  the  early  years  of 
the  decade  beginning  with  1870.  The  fortunes  of  this 
corrupt  organization  were  fostered  by  the  connivance  of 
many  influential  persons  high  in  public  authority.  Or- 
ganized at  first  for  the  promotion  of  certain  political 
aims,  after  their  accomplishment  it  was  conducted  for 
the  fraudulent  advancement  of  private  ends ;  and  so 
notorious  at  last  became  its  operations,  and  so  wide- 
spread its  influence,  —  the  nation  itself  being  co-exten- 
sive with  its  operations,  —  that  an  investigation  was 
made,  its  methods  exposed,  and  the  principals  brought 
to  justice.  The  enormity  of  the  ring's  operations  will 
never  be  fully  known,  but  a  partial  appreciation  may  be 
had  from  the  fact  that  in  St.  Louis  alone  the  losses  to 
the  revenue  approximated    $1,200,000   annually.1      As 

1  For  a  graphic  account  of  the  methods  and  aims  of  the  ring,  as 
well  as  the  many  prominent  puhlic  officials  implicated,  see  the  con- 
fession of  General  John  McDonald,  "  The  Secrets  of  the  Great  Whis- 
key Ring,  and  the  newspapers  of  the  day." 


202  THE  INTERNAL  REVENUE  SYSTEM. 

further  indicative  of  the  immensity  of  its  operations,  the 
commissioner  reported  in  1875,  that  he  had  document- 
ary evidence  that  warranted  him  in  seizing  twenty-four 
distilleries  and  thirty-seven  rectifying  houses,  implicat- 
ing over  fifty  United  States  officials.  The  evidence 
further  showed  that  there  had  been  issued  during  the 
ten  months  extending  from  July  1, 1874,  to  May  1, 1875, 
20,000  packages  of  fraudulent  spirits ;  while,  by  the  aid 
of  false  gauging,  over  one  million  additional  gallons 
escaped,  entailing  a  loss  to  the  government  during  this 
comparatively  short  period  of  $  1,650, 000.1  During  the 
years  covered  by  the  operations  of  the  ring,  the  total 
losses  to  the  Treasury  amounted  to  at  least  four  million 
dollars. 

Since  this  time  the  revenue  service  has  been  con- 
ducted with  singular  fidelity,  and  has  steadily  improved 
in  efficiency.  Evasions  still  occur,  and  some  illicit  dis- 
tillation is  still  carried  on  in  the  outlying  districts  and 
in  the  large  cities.  Discoveries  of  illicit  distillation 
have  markedly  increased  since  the  last  increase  in  the 
rate  to  $1.10  per  gallon;  and  the  average  number  of 
stills  destroyed  since  the  rate  went  into  effect  has 
approximated  one  hundred  and  fifty  per  month.  The 
most  strenuous  efforts  of  the  department  have  been 
ineffectual  in  closing  up  the  moonshine  stills  in  the 
South;  and  recently  large  numbers  of  small  stills  have 
been  discovered  in  the  Xorthern  cities,  where  a  still 
with  a  capacity  of  forty  or  fifty  gallons  per  day  can  be 
secreted  in  a  cellar  or  garret,  and  an  inferior  quality  of 
spirits  produced  at  an  average  cost  of  less  than  twenty- 
five  cents  per  gallon.  Such  a  still  costs  but  a  few  dol- 
1  Report  on  Finances,  1S75,  p.  157. 


ITS  ADMINISTRATION.  203 

lars,  and  detection  is  only  possible  as  the  spirits  are 
placed  on  the  market.  The  loss  which  accrues  to  the 
revenues  from  this  source  cannot  be  estimated  with  any 
exactitude,  but  it  has  been  placed  at  more  than  four 
million  dollars  annually. 

In  concluding  this  sketch  of  the  years  of  experimenta- 
tion by  means  of  which  the  present  perfected  machinery 
foi  the  garnering  of  the  resources  of  the  nation  into  the 
Federal  Treasury  has  been  brought  about,  it  may  not  be 
inadvisable  to  describe  in  some  detail  the  workings  of 
the  internal  revenue  department  in  the  collection  of  the 
several  taxes  at  present  imposed.  The  ground  plan  of 
the  system  has  not  changed  fundamentally  from  the  out- 
lines defined  by  Hamilton  over  one  hundred  years  ago. 
As  in  the  department  of  customs,  the  chief  ministerial 
officer  is  the  commissioner,  whose  duties  remain  sub- 
stantially as  outlined  in  the  Act  of  1862,  as  described 
in  an  earlier  portion  of  this  chapter.  In  recent  years, 
with  the  gradual  reduction  of  the  system,  there  has  been 
a  tendency  to  centralize  and  simplify  the  collection  of 
the  taxes,  as  is  seen  in  the  abolition  of  -the  offices  of  dis- 
trict assessors,  as  well  as  in  the  reduction  of  the  collec- 
tion districts,  of  which  there  are  at  the  present  time 
but  sixty-three.1  It  is  now  the  duty  of  the  commissioner 
to  make  all  inquiries,  determinations,  and  assessments 
of  all  taxes  and  penalties,  and  to  certify  a  list  of  such 
assessments  to  the  collector  of  the  proper  district,  who 
is  authorized  to  collect  and  account  for  the  same  to 
the  commissioner.  The  latter  officials  are  appointed  by 
the  President,  by  and  with  the  consent  of  the  Senate, 

1  The  number  was  reduced  to  131  in  1876;  to  12G  in  1877;  to  84  in 
1883 ;  and  to  G3  by  Executive  Order  of  May  21,  1887. 


20-1  THE  INTERNAL  REVENUE  SYSTEM. 

and  must  be  residents  of  the  districts  in  which  they 
serve.  Every  collector,  before  entering  upon  the  duties 
of  his  office,  is  required  to  execute  a  bond,  with  not  less 
than  five  sureties,  conditioned  upon  the  faithful  per- 
formance of  his  duties.  He  is  then  empowered  to 
appoint  as  many  deputies  as  he  may  deem  necessary, 
for  whose  actions  he  is,  in  a  like  manner,  held  re- 
sponsible. 

In  addition  to  the  official  force  directly  employed  in 
the  collection  of  the  taxes,  there  are  appointed  by  the 
commissioner  a  certain  number  of  special  agents,  who 
are  deployed  from  the  central  office  for  the  purpose  of 
checking  any  attempted  evasion  or  suspected  complicity 
on  the  part  of  other  officials ;  while  the  Secretary  of  the 
Treasury  is  authorized  to  appoint,  wherever  ■  deemed 
necessary,  a  certain  number  of  gaugers  and  storekeepers, 
whose  duties  will  be  described  later. 

SPECIAL    OR   LICENSE    TAXES. 

The  license  taxes  now  remaining  upon  the  statute 
books  may  be  looked  upon  as  subsidiary  and  ancillary 
to  the  general  specific  duties  imposed  upon  distilled  and 
malt  liquors,  tobacco,  and  oleomargarine.  Since  1872  1 
all  license  taxes  have  been  collected  by  means  of  stamps, 
which  must  be  conspicuously  displayed  in  the  place  of 
business ;  and  on  default  of  the  same  the  dealer  is  sub- 
ject to  severe  penalties.  The  duty  is  a  graduated  one, 
and  applies  to  all  persons,  firms,  and  copartnerships 
engaged  in  the  business  of  manufacturing,  selling,  or  dis- 
tributing these  articles,  save  retail  tobacco  dealers,  who 

l  By  Act  of  Dec.  24,  1872. 


ITS  ADMINISTRATION.  205 

liave  been  exempt  since  1890. l  It  is,  in  effect,  a  charge, 
as  a  condition  precedent  to  the  transaction  of  business ; 
and  the  rates  range  from  $G00  upon  the  manufacturers 
of  oleomargarine  and  $200  on  rectifiers  of  spirits  hav- 
ing a  still  capacity  of  500  barrels  or  more,  down  to  $20 
upon  retail  dealers  in  malt  liquors.  Every  person  en- 
gaged in  any  one  of  the  businesses  subject  to  the  tax  is 
required  to  register  with  the  collector  of  the  district, 
and  furnish  specific  information  in  regard  to  his  resi- 
dence, place  of  business,  etc. 

DISTILLED    SPIRITS. 

No  portion  of  the  service  has  been  the  object  of 
greater  attention  on  the  part  of  the  government  than 
the  collection  of  the  tax  upon  distilled  spirits,  and  no 
part  of  the  system  is  now  administered  with  greater 
fidelity.  However  faulty  the  collections  may  have  been 
in  the  past,  it  is  safe  to  say  that  at  the  present  time 
evasion  is  almost  unknown  outside  of  the  "  moonshine  " 
districts  in  the  mountainous  regions,  and  in  the  large 
cities.  By  a  system  of  checks  and  espionage,  the  pro- 
duction of  distilled  spirits  is  substantially  in  the  hands 
of  the  government;  for  it  oversees  the  production  of 
the  article  from  the  moment  the  grain  enters  the  store- 
house until  the  manufactured  article  is  retailed.  The 
distiller  is  little  more  than  the  agent  of  the  government 
in  the  matter.  He  invests  his  capital,  and  assumes  all 
the  risks.  His  still  must  be  constructed  according  to 
approved  plans,  his  machinery  must  pass  inspection  and 

1  By  Act  of  Oct.  1,  1890,  so  much  of  the  tax  as  applied  to  dealers 
in  tohacco  and  cigars,  manufacturers  and  peddlers  of  the  same,  was 
repealed. 


206  THE  INTERNAL   REVENUE  SYSTEM. 

be  of  an  approved  pattern,  ere  he  can  begin  operations. 
No  movement  goes  unrecorded,  the  severest  penalties 
are  enforced  against  him  for  breach  of  regulations,  and 
his  entire  plant  and  bond  may  become  forfeited  upon 
some  mischance  or  inadvertent  act.  Even  the  keys  of 
the  cistern-rooms,  fermenting-tubs,  warehouses,  etc.,  are 
in  the  hands  of  the  government ;  and  the  distiller  is  even 
denied  access  to  the  place  of  manufacture  save  upon 
permission,  or  to  the  warehouse  after  the  spirits  have 
been  placed  in  bond.  Not  only  is  the  distiller  required 
to  transmit  to  the  collector  a  minute  account  of  the 
operations  of  the  still,  but  a  government  storekeeper  is 
placed  in  charge  of  each  distillery,  whose  duty  it  is,  in 
addition  to  the  oversight  of  the  warehouse,  to  keep  a 
daily  account  of  all  the  materials  brought  to  the  dis- 
tillery to  be  used  in  the  business,  of  all  fuel  consumed, 
repairs  made  and  by  whom,  of  the  materials  put  into 
the  mash-tub,  of  the  time  when  any  fermenting-tub  is 
emptied,  and  of  all  the  spirits  drawn  off  from  the 
receiving-cistern,  and,  in  fact,  every  operation  of  the 
business.  All  of  this  is  carefully  recorded,  and  trans- 
mitted to  the  Commissioner  of  Internal  Revenue,  as 
well  as  to  the  collector  of  the  district.  From  the  dis- 
tiller a  similar  account  is  also  required.  "When  pro- 
duced, the  spirits  are  placed  in  packages  under  the 
supervision  of  the  gauger,  who  proves  the  same,  and 
cuts  upon  the  package  containing  the  spirits  the  quan- 
tity contained  therein  in  wine  and  proof  gallons.  They 
are  then  removed  to  the  warehouse,  where  the  gauger, 
in  the  presence  of  the  storekeeper,  places  upon  the  head 
of  the  package  an  engraved  stamp,  signed  by  the  collec- 
tor of   the  district  as  well  as  by  the  storekeeper  and 


ITS  ADMINISTRATION.  207 

ganger,  upon  which  is  written  the  number  of  proof  gal- 
lons in  the  cask,  the  name  of  the  distiller,  date  of 
receipt  in  the  warehouse,  and  the  serial  number  of  each 
cask  or  package.  Here  they  are  permitted  to  remain 
for  the  term  of  eight  years,  when  they  must  be  with- 
drawn, tax  paid,  under  penalty  of  forfeiture  of  bond,  and 
placed  upon  the  market.  Upon  withdrawal,  they  again 
pass  under  the  review  of  the  several  officers  of  the  gov- 
ernment, are  gauged,  and  allowance  made  for  leakage. 
The  package  is  again  stamped,  the  contents  noted  upon 
the  package,  and  the  article  is  ready  for  market. 

By  this  system  of  checks  and  counter  checks,  success- 
ful evasion  in  a  registered  distillery  has  become  well 
nigh  impossible.  To  perpetuate  fraud,  it  is  first  neces- 
sary to  secure  the  co-operation  of  the  gauger  and  store- 
keeper in  the  making  of  returns.  But  even  this  is 
highly  dangerous,  from  the  fact  that  the  government  is 
in  possession  of  records  relative  to  the  producing  capa- 
city of  each  still,  as  well  as  the  fermenting  and  mashing 
period  of  the  same.  As  a  further  check,  officials  are  lia- 
ble to  be  transferred  from  one  still  to  another,  without 
notice ;  while  the  special  agents  and  surveyors  in  the 
employ  of  the  government  are  empowered  at  all  times 
to  enter  and  examine  the  books  and  operations  of  every 
still,  and  report  on  the  condition  of  the  same. 

In  the  fiscal  year  1894,  2,729  violations  of  the  inter- 
nal revenue  laws  were  reported  by  the  revenue  agents, 
which  led  to  the  arrest  of  632  persons,  and  the  seizure  of 
$246,197.96  worth  of  property;  while  over  forty  thou- 
sand dollars  worth  of  property  was  seized  for  unpaid 
taxes  and  penalties. 


208  THE  INTERNAL   REVENUE  SYSTEM. 


FERMENTED    LIQUORS. 

Before  commencing  business,  every  brewer  is  required 
to  file  with  the  collector  of  bis  district  a  notice  of  such 
intention,  as  well  as  a  description  of  the  premises  em- 
ployed, and  to  execute  a  bond  in  a  sum  equal  to  three 
times  the  amount  of  the  tax,  which,  in  the  opinion  of 
the  collector,  the  brewer  will  be  liable  to  pay  during  a 
month,  conditioned  upon  the  faithful  execution  of  the 
law,  and  the  payment  of  tbe  tax  upon  his  product.  He 
is  further  required  to  render  to  the  collector  monthly  a 
verified  statement  of  the  operations  of  his  brewery,  the 
amount  of  beer  produced  and  sold,  and  to  keep  his 
books  open  at  all  times  to  the  inspection  of  the  govern- 
ment. 

The  same  careful  scrutiny  and  supervision  provided 
in  the  case  of  distilled  spirits  has  been  found  to  be  need- 
less in  the  case  of  the  tax  on  fermented  liquors,  which 
is  largely  self  assessed.  Stamps  are  used  as  in  other 
subjects,1  but  the  brewer  is  permitted  to  affix  them  him- 
self. But  in  order  to  prevent  their  re-use  they  are  re- 
quired to  be  placed  over  the  spigot  hole  on  the  head  of 
every  barrel  upon  sale  or  removal  from  the  warehouse, 
which  stamp  shall  be  destroyed  by  driving  a  faucet 
through  the  same,  and  cancelled  by  writing  across  the 
face  of  the  stamp  the  name  of  the  person  by  whom 
such  liquor  was  made,  as  well  as  the  date  when  can- 
celled. 

Severe  penalties  are  imposed  upon  manufacturers  or 
dealers  for  failure  to  comply  with  these  requirements. 

i  The  Act  of  July  13,  1866,  provided  for  this  change. 


ITS  ADMINISTRATION.  209 


TOBACCO,    CIGARS,    AND    SNUFF. 

In  the  collection  of  the  tax  upon  tobacco  in  its  vari- 
ous forms,  the  government  depends  almost  wholly  upon 
the  use  of  stamps  as  a  prevention  of  fraudulent  produc- 
tion. This  method  was  first  introduced  in  1868,  at  the 
instance  of  the  manufacturers  themselves ;  and  it  has 
proven  most  efficient  as  a  means  for  the  detection  of 
false  returns.  Before  commencing  manufacture,  every 
producer  is  required  to  furnish  to  the  collector  of  the 
district  a  verified  statement  of  the  location  of  his  busi- 
ness, the  number  of  machines  used,  quality  of  tobacco 
produced,  etc.,  and  to  furnish  bond  in  amount  ranging 
from  $2,000  to  $20,000,  conditioned  that  he  will  not 
attempt  to  defraud  the  government  in  the  payment  of 
the  tax,  and  that  he  will  make  due  return  of  all  his  pro- 
cesses, and  will  properly  stamp  all  his  output.  Failure 
to  comply  with  these  preliminary  requirements  renders 
the  manufacturer  liable  in  amounts  ranging  from  $100 
to  $5,000,  and  imprisonment.  In  the  conduct  of  his 
business  the  manufacturer  is  subject  to  the  same  restric- 
tions as  in  the  case  of  the  production  of  malt  and  dis- 
tilled liquors ;  he  must  place  a  conspicuous  sign  upon 
his  premises,  take  an  annual  inventory  of  all  stock  on 
hand,  and  keep  an  itemized  account  of  all  the  operations 
of  his  business,  recording  all  tobacco  purchased  by  him, 
as  well  as  the  amount  removed  for  consumption  and  sale, 
or  transferred  in  bond,  and  must  make  a  verified  return 
of  the  same  monthly  to  the  collector,  subject  to  severe 
penalties  in  case  of  failure.  Further  stipulations  are 
imposed  in  the  directions  for  packing  and  shipping 
tobacco,  the  manufacturer  being  required  to  put  up  his 


210         THE  INTERNAL   REVENUE  SYSTEM. 

product  in  certain  prescribed  packages,  and  to  stamp  the 
same,  and  print  thereon  the  manufacturer's  name  and 
place  of  manufacture,  the  registered  number  of  the  fac- 
tory, and  the  weight  of  the  contents  of  the  package. 
And  if  any  person  receives  for  sale  tobacco  which  lias 
not  been  properly  stamped  and  branded,  he  shall  be  held 
liable  in  severe  penalties  in  a  like  manner.  The  provis- 
ions are  the  same  in  regard  to  the  manufacture  and  sale 
of  cigars. 

OLEOMARGARINE    AND    OPIUM. 

As  the  duties  upon  oleomargarine  and  opium  are  pro- 
fessedly protective  and  sumptuary,  and  not  designed  as 
revenue  measures,  consideration  of  them  has  been  de- 
ferred to  the  present  chapter.  The  measure  imposing  a 
duty  on  oleomargarine  was  passed  in  1886,1  in  response 
to  the  existing  sentiment  against  its  use  and  the  de- 
mands of  the  agricultural  interests  ;  and  the  measure  has 
been  the  precursor  of  kindred  acts  in  nearly  all  of  the 
States,  which  have  quite  effectually  stopped  its  use. 
The  rate  of  the  tax  is  two  cents  per  pound,  or  frac- 
tion thereof,  while  special  license  charges  are  imposed 
upon  manufacturers  of  $600,  upon  wholesale  dealers  of 
$480,  and  upon  retail  dealers  of  $48. 

In  the  assessment  and  collection  of  the  duty  the  same 
minute  regulations  regarding  registration,  bond,  the  keep- 
ing of  books,  and  returns  to  the  collector,  are  provided 
as  in  other  subjects ;  while  the  product  must  be  packed, 
branded,  and  stamped  according  to  the  directions  of  the 
department.     Like  provisions  apply  to  the  manufacture 

1  Act  of  Aug.  2. 


ITS  ADMINISTRATION.  211 

of  opium  for  smoking  purposes,  the  rate  of  tax  being 
ten  dollars  per  pound.1  The  recent  measure  of  Aug. 
24,  1894,  in  so  far  as  it  related  to  the  taxation  of  play- 
ing-cards, adapted  the  stamp  and  registration  system  to 
this  subject.2 

The  collections  on  behalf  of  the  duties  on  oleomarga- 
rine and  opium  are  as  follows  :  — 


OLEOMABGAKINE.         OI'Il'M. 

OLEOMABGABINE. 

opima 

1887 

$    723,948 

1892 

$1,266,326 

$700 

1888 

864,149 

1893 

1,670,644 

125 

1889 

894,248 

1894 

1,723,480 

410 

1890 

786,294 

1895 

1,409,211 

1891 

1,007,924 

COST    OF    COLLECTION". 

Early  experience,  as  well  as  the  prevailing  opinion 
at  the  outbreak  of  the  war,  inclined  to  the  belief  that 
taxes  from  inland  sources  would  be  so  costly  of  collec- 
tion as  to  be  of  doubtful  availability.  If  a  tax  signally 
fail  in  this  respect,  it  is  not  easily  defensible ;  and,  while 
every  indirect  tax  is  more  or  less  cumulative  in  its 
nature,  still,  in  so  far  as  the  initial  cost  of  collection 
is  concerned,  it  may  be  contended  that  the  excise  taxes 
have  proven  to  be  the  most  economical  of  duties.  In 
this  respect  they  stand  pre-eminent,  for  neither  the  cus- 
toms revenue  nor  the  States'  systems  return  receipts 
to  the  public  treasury  at  so  slight  a  charge  as  does 
the  federal  excise. 

During  the   period   from   1812  to  1816  the  charges 

i  Act  of  Oct.  1,  1890. . 

2  For  existing  laws  relative  to  internal  revenue  department  and 
the  assessment  and  collection  of  the  several  taxes,  see  Revised  Stat- 
utes of  the  United  States. 


212  THE  INTERNAL    REVENUE   SYSTEM. 

for  collection  ranged  from  7.8  to  4.8  per  cent,  and  at 
the  organization  of  the  department  of  internal  revenue 
in  1862  it  was  estimated  that  the  cost  of  collecting  the 
excise  tax  would  considerably  exceed  the  customs.  From 
the  wide  expanse  of  territory,  the  almost  infinite  num- 
ber of  taxable  articles,  the  untrained  condition  of  the 
service,  it  was  variously  estimated  during  the  pendency 
of  the  first  internal  revenue  measure  in  the  Thirty-sev- 
enth Congress  that  the  charges  for  collection  would  be 
from  seven  to  twelve  per  cent;  and  it  Avas  freely  con- 
tended that  the  excise  proper  could  not  reach  the  Treas- 
ury for  less  than  fifteen  or  twenty  per  cent  of  its 
amount.  Experience  soon  demonstrated  the  falsity 
of  these  predictions ;  for  many  of  the  taxes,  such  as 
licenses,  stamp-duties,  and  the  taxes  on  corporations, 
cost  comparatively  little  and  were  highly  productive ; 
while  the  income  tax,  which  returned  nearly  eleven 
per  cent  of  the  entire  revenue  collected  from  inland 
sources,  was  likewise  an  inexpensive  one  to  collect. 

During  the  first  year's  operation  of  the  system,  the 
receipts  were  comparatively  light,  —  but  little  over  forty- 
one  millions,  —  while  the  expenditures  consequent  upon 
the  inauguration  of  a  new  system  were  necessarily 
heavy.  As  the  collections  gradually  increased,  how- 
ever, from  1863  to  1866,  in  which  latter  year  they 
attained  the  sum  of  three  hundred  and  ten  millions, 
the  charges  for  administration  gradually  diminished, 
until,  during  the  latter  fiscal  year,  they  were  reduced  to 
one-half  of  what  they  had  been  in  1863. 

The  percentage  cost  of  collection  during  this  period, 
and  the  gross  receipts  from  internal  revenues,  were  as 
follows  :  — 


ITS   ADMIN  IS  TEA  TION. 


213 


TOTAL  REVENUE. 

COST  OF 

COLLECTION 

1863    . 

.      $  41,003,192.93 

5.15 

per  cent. 

1864    . 

.     .   117,145,748.52 

3.28 

" 

1865 

.     .   211,129,529.17 

2.28 

" 

1866    . 

.     .   310,906,9S4.17 

2.22 

" 

1867     . 

.     .  265,920,474.05 

2.69 

" 

At  the  present  time  the  receipts  from  this  source  are 
returned  to  the  public  coffers  at  an  expense  of  less  than 
three  per  cent,1  the  customs  costing  somewhat  more  than 
that  amount. 


1  In  1893  the  percentage  cost  of  collection  was  2.62  per  cent;  in 
1894,  2.70  per  cent;  and  in  1895,  2.88  per  cent. 


214  TEE  INTERNAL   REVENUE   SYSTEM. 


CHAPTER   VIII. 

INTERNAL   TAXATION   UNDER   PEACE    CONDITIONS, 
1870-1895. 

By  1870  the  country  had  in  large  part  adjusted 
itself  to  the  changed  economic  and  industrial  conditions, 
the  echoes  of  the  war  were  slowly  being  lost  in  the 
gathering  hum  of  the  enlarged  industrial  development 
upon  which  the  country  was  entering,  while  an  era  of 
unparalleled  railway  construction  was  rapidly  converting 
the  distracted  energies  of  the  South  and  the  hidden  re- 
sources of  the  great  West  into  richness  and  abundance. 

The  population  of  the  United  States  at  this  time 
numbered  38,558,371.  The  national  debt  amounted  to 
$2,480,672,427,  or  $64  per  capita,  a  reduction  since 
1865  of  $363,977,199,  at  the  average  annual  rate  of 
$72,795,439.  The  annual  interest  charge  thereon  was 
$118,784,960.1 

Before  entering  upon  a  consideration  of  the  modifica- 
tions introduced  into  the  internal  revenue  system  during 
the  last  quarter  of  a  century,  it  may  not  be  out  of  place 
to  contemplate  for  a  moment  the  changes  which  have 
come  over  budgetary  management  during  the  period. 
As  has  been  frequently  remarked,  the  growth  of  con- 
stitutional government  has  been  accompanied  by  a  phe- 

1  The  interest  charge  of  the  deht  is  very  variable,  owing  to  the 
•refunding  operations.  In  1893  the  interest  charge  had  been  reduced 
to  one-fifth  its  size  in  1871,  although  the  principal  of  the  debt  had 
been  reduced  but  little  over  one-third. 


UNDER   PEACE   CONDITIONS.  215 

nomenal  increase  in  expenditure.  In  America  this 
tendency  has  manifested  itself  in  river  and  harbor 
improvements,  the  erection  of  public  buildings,  the 
advancement  of  science  and  education,  in  pension  legis- 
lation, Indian  appropriations,  and  the  creation  of  a 
naval  establishment ;  and,  in  fact,  in  every  line  of  gov- 
ernmental activity.  This  increase  in  expenditure  forms 
the  peculiar  feature  of  the  period  we  are  about  to  con- 
sider. How  marked  this  change  has  been  in  the  attitude 
of  the  nation  toward  itself,  and  the  proper  constitu- 
tional sphere  of  federal  activity,  is  apparent  from  an 
examination  of  the  expenditures  for  the  two  fiscal  years, 
1860  and  1870.     The  disbursements  are  as  follows  :  — 

1S60  1S70 

War $16,472,202  $57,655,675 

Navy 11,514,649  21,780,229 

Indians 2,991,121  3,407,938 

Pensions 1,100,802  28,340,202 

Miscellaneous 27,977,978  53,237,401 

NetDrdinary  expenditure      .     $60,056,752  $164,421,505 

Public  debt 13,854,250  393,254,282 

Premiums 15,996,555 

Interest 3,144,120  129,235,498 

Total  expenditure  ....  $77,055,120  $702,907,840 
The  increase  in  expenditure  for  the  first  five  items  is 
over  one  hundred  millions.  While  the  population  in- 
creased twenty-two  and  six-tenths  per  cent,  the  ex- 
penditure of  the  country  increased  one  hundred  and 
seventy-three  per  cent;  and  if  we  add  to  this  the  dis- 
bursements incident  to  the  war  debt,  we  find  the  an- 
nual expenditures  nearly  decupled. 

Previous  to  18G0,  as  we  have  seen,  the  excise  had 
been  viewed  as  a  sort  of  fiscal  reserve,  only  to  be 
brought  into  action  in  case  of  urgent  necessity ;  but  at 


216  THE  INTERNAL    REVENUE   SYSTEM. 

the  termination  of  the  Civil  War,  in  view  of  the  burden 
of  indebtedness  which  it  had  entailed,  it  became  appar- 
ent that  the  earlier  resources  were  no  longer  adequate 
to  satisfy  the  larger  fiscal  needs  of  the  country.  The 
war  had,  moreover,  induced  a  more  generous  view  of  the 
Constitution,  and  the  conservative  hostility  which  had 
prevented  the  utilization  of  federal  powers  during  the 
long  tenure  of  the  Democratic  party  no  longer  existed ; 
while  the  subsequent  inclination  of  the  government  to 
engage  in  all  sorts  of  expenditure  for  various  internal 
purposes  rendered  the  utilization  of  inland  sources  as  a 
portion  of  the  permanent  fiscal  service  a  necessity.  The 
reduction  in  expenditure  between  the  years  1866  and  1870 
rendered  it  possible  to  dispense  with  nearly  all  the  extraor- 
dinary war  taxes,  and  to  concentrate  the  system  upon 
the  broad  and  elastic  basis  of  consumption.  The  income 
tax  was  retained  until  1872,  as  were  the  bank  taxes,  and 
several  unimportant  duties  on  manufactured  products.  In 
1870  the  receipts  from  these  sources  were  as  follows  :  — 

Spirits $55,581,599.18 

Tobacco 31,350,707.88 

Fermented  liquors 6,319,126.90 

Banks  and  bankers 4,419,911.13 

Gross  receipts 6,894,799.99 

Sales 8,837,394.97 

License  taxes '.     .  9,620,960.26 

Income 37,775,873.62 

Legacies 1,672,582.93 

Successions 1,419,242.57 

Articles  in  schedule  A 907,442.09 

Passports 22,756.00 

Gas 2,313,417.37 

Sources  not  elsewbere  enumerated    .  728,105.30 

Penalties 827,904.72 

Adhesive  stamps 16,544,043.06 

Total $185,235,867.07 


UNDER   PEACE  CONDITIONS.  217 

The  suitableness  of  distilled  and  malt  liquors  and 
tobacco  for  taxation  is  'recognized  by  nearly  every  civil- 
ized country,  and  it  is  the  uniform  practice  of  European 
governments  to  derive  from  them  the  largest  possible 
revenue  consistent  with  efficiency  of  administration.  Of 
well-nigh  universal  consumption  a§  they  are,  socially 
harmful  in  their  effects,  and  non-essential  to  the  comfort 
and  well-being  of  a  people,  the  payment  of  the  taxes 
upon  whiskey,  beer,  and  tobacco  may  be  viewed  as  a 
sum  abstracted  from  the  surplus  fund  of  individual  in- 
come. Furthermore,  such  taxes  are  but  little  obstruc- 
tive of  industrial  freedom,  and  there  is  no  evidence  that 
even  the  highest  rate  imposed  has  ever  proven  produc- 
tive of  any  very  general  discontent.  From  the  mass  of 
the  people  the  cry  for  free  whiskey  and  free  tobacco 
meets  no  answering  response ;  and  in  the  past  such  agi- 
tation has  been  largely  of  a  political  character,  for  the 
purpose  of  distracting  attention  from  an  increase  in  the 
tariff  rates,  or  an  attempt  to  reduce  a  possible  surplus 
in  the  Treasury. 

Since  1868  the  history  of  the  taxation  of  these  sub- 
jects has  been  quite  uneventful.  The  reduction  of  the 
rate  on  distilled  spirits  to  fifty  cents  a  gallon1  was  ac- 
companied with  results  most  phenomenal.  It  is  possibly 
too  much  to  ascribe  the  subsequent  increase  in  the  reve- 
nues and  improvement  in  their  collection  wholly  to  the 
reduction  of  the  rates ;  for  changes  in  the  method  of  ad- 
ministration were  also  introduced,  which  greatly  simpli- 
fied collections,  and  rendered  evasion  by  the  ordinary 
methods  well-nigh  impossible.  Since  this  time  all 
taxes,  specific,  ad  valorem,  and  license,  have  been  col- 
i  By  Act  of  July  20,  1868. 


218  THE  INTERNAL   REVENUE  SYSTEM 

lected  by  means  of  stamps,  affixed  to  the  packages  con- 
taining the  commodity  or  displayed  in  the  place  of 
business.  The  specific  tax  of  fifty  cents  on  whiskey, 
with  the  subsidiary  capacity  tax,  remained  in  force 
from  July,  1868,  to  August,  1872,  during  which  period 
the  tax  was  assessed  upon  an  average  production  of 
67,000,000  gallons,  which  yielded  an  average  annual 
revenue  of  $34,000,000,  indicating  an  average  annual 
per  capita  consumption  of  1.65  gallons. 

By  the  same  Act  the  rates  upon  manufactured  tobacco 
and  cigars  were  placed  as  follows  :  — 

Snuff $0.32  per  pound. 

Che  wing  find  other  tobacco  prepared  by  hand,    .32        " 

Smoking  tobacco 16         " 

Cigars 5.00  per  1000. 

Cigarettes 1-50        " 

Alterations  were  also  made  in  the  method  of  assess- 
ment. Instead  of  the  tax  being  collected  after  removal 
from  the  place  of  manufacture  and  sale,  the  duty  from 
this  time  on  was  prepaid  by  means  of  soluble  stamps,1 
placed  upon  the  package  at  the  place  of  manufacture. 
Goods  were  required  to  be  placed  in  certain  forms  of 
packages,  which  were  to  indicate  the  manufacturers' 
name,  place  of  manufacture,  trade-mark,  contents  and 
weight  of  package,  etc.  Itemized  returns  were  also 
required  from  the  producer  in  regard  to  his  business. 
Failure  to  comply  with  these  requirements  rendered  the 
producer  liable  to  heavy  penalties,  as  did  any  attempt 
to  place  untaxed  goods  on  the  market  by  a  dealer.     By 

1  The  stamps  were  printed  in  fugitive  ink,  which  disappeared 
when  washed  for  the  purpose  of  re-use. 


UNDER   PEACE  CONDITIONS.  219 

the  same  Act  existing  taxes  on  mineral  or  illuminating 
oils  and  refined  petroleum  were  repealed. 

The  revenues  from  tobacco  immediately  responded  to 
the  change.  In  1868  the  receipts  were  $18,729,000.  In 
1869  they  rose  to  $23,430,707,  a  gain  of  four  and  three- 
quarter  millions.  Again,  in  1870  they  increased  to 
$31,350,707,  and  in  1871  to  $33,578,907.  Fraudulent 
evasion  of  the  tax  was  greatly  diminished.  Some  little 
loss  did  occur  through  the  refilling  and  re-use  of  stamped 
packages,  and  the  improper  classification  of  manufac- 
tured tobacco.  It  was  easily  possible  for  producers  to 
take  advantage  of  the  difference  of  rates  on  chewing  and 
smoking  tobacco  to  place  the  former  on  the  market  at 
rates  applicable  only  to  the  latter ;  and  it  was  difficult  to 
impute  or  prove  fraud,  or  to  correct  the  evil,  save  by  a 
uniform  rate,  which  change  was  later  adopted. 

But,  despite  the  gratifying  showing  of  the  revenues, 
agitation  was  soon  renewed  for  change.  The  profits 
previously  secured  by  speculators  and  producers  from 
legislative  changes  were  too  sweet  to  be  willingly  relin- 
quished ;  and  Congress  was  not  deaf  to  the  proposals  for 
an  increase  of  duties,  by  which  gains  were  legislated 
into  the  pockets  of  speculators  by  increasing  the  rate 
without  rendering  it  applicable  to  stock  in  bond.  At 
the  same  time  temperance  agitators,  who  viewed  a  high 
rate  on  whiskey  and  tobacco  as  advisable  on  sumptuary 
grounds,  advocated  an  increase  in  the  duties,  thinking  it 
would  serve  as  a  deterrent  to  their  use.  In  1872,  in 
response  to  this  pressure,  the  rate  upon  whiskey  was 
changed  from  the  mixed  one  then  prevailing,  the  barrel 
and  capacity  tax  being  repealed,  while  the  specific  rate 
was  increased  by  twenty  cents  or  to  seventy  cents  per 


220  THE  INTERNAL   REVENUE  SYSTEM 

gallon.  The  change  was  largely  an  administrative  one, 
as  the  several  duties  then  prevailing  had  aggregated  be- 
tween sixty-five  and  seventy  cents  per  gallon. 

By  the  same  measure  all  manufactured  tobacco,  what- 
ever its  value  or  use,  was  rendered  dutiable  at  a  uniform 
rate,  the  duty  \ip  to  1875  being  twenty  cents  per  pound.1 
While  this  was  equivalent  to  a  reduction  of  six  cents 
per  pound,  or  of  22i  per  cent  on  the  average  rate  for  the 
two  preceding  years,  the  diminution  in  receipts  from 
tobacco  for  the  year  1873  was  but  little  over  one  million 
dollars,  while  the  increase  in  tax-paid  production  was 
over  nineteen  and  one-half  million  pounds,  a  result  trace- 
able in  large  part  to  the  fact  that  unmanufactured  to- 
bacco under  the  new  law  was  taxed  at  substantially  the 
same  rate  as  the  manufactured  article,  whereas  it  had 
formerly  been  practically  exempt. 

These  changes  were  uniformly  in  the  line  of  im- 
provement ;  for  while  it  is  to  be  acknowledged  that 
there  is  some  injustice  in  the  taxation  of  any  article 
like  tobacco,  whose  value  varies  so  widely,  at  a  uniform 
rate,  experience  has  shown  that  assessments  are  likely 
to  be  so  arbitrary  that  a  specific  rate  is  preferable  to  an 
ad  valorem  one,  for  the  latter  offers  great  opportuni- 
ties for  fraudulent  practice,  false  swearing,  and  compli- 
cations in  valuation. 

Again,  in  1875,  the  rate  on  spirits  was  advanced  to 
ninety  cents  per  gallon,  where  it  remained  unaltered 
until  1801.  In  the  taxation  of  the  latter  article  the  ex- 
perience of  these  years  is  marked  by  phenomena  similar 
to  those  of  the  war,  although  less  monstrous,  and  brought 
home  to  officials  high  in   the    government   service.     It 

1  When  it  was  again  increased  to  twenty-four  cents  per  pound. 


UNDER    PEACE   CONDITIONS.  221 

is  not  true,  however,  as  is  frequently  asserted,  that  the 
frauds  disclosed  in  1875  were  due  to  the  increase  in 
the  rates  ;  for,  although  discovered  immediately  after  the 
passage  of  the  Act  of  that  year,  they  were  traceable 
to  complicity  and  conspiracy  of  officials,  and  had  been  in 
existence  for  many  years  previous  to  the  change.  That 
the  increase  of  the  rate  to  ninety  cents  was  a  source  of 
gain  to  speculators  there  is  no  doubt,  for  the  new  duty 
was  not  made  operative  on  stock  in  bond.  During  the 
three  months  previous  to  the  date  when  the  increased 
rate  went  into  operation,  there  was  made  and  stored 
sufficient  spirits  to  cause  a  loss  to  the  revenues  of 
$1,400,000.  This  loss  was  but  temporary,  however  ;  and 
from  this  time  on  down  to  the  present  day  the  revenues 
from  this  source  have  steadily  increased  in  amount,  and 
there  is  no  reason  to  suppose  that  the  tax  was  not  as 
universally  collected  as  under  the  earlier  and  lower  rate. 
"With  the  general  revival  of  trade  which  set  in  during 
the  years  immediately  preceding  1880,  the  receipts  from 
the  several  sources  of  internal  revenue  manifest  a  marked 
improvement.  Beginning  with  1878,  they  increase  from 
$110,000,000  in  that  year  to  $124,000,000  in  1880,  to 
$135,000,000  in  1881,  and  to  $146,500,000  for  the  fiscal 
year  1882.  At  this  time  there  remained,  as  a  heritage 
of  the  war,  taxes  upon  the  following  subjects,  which 
produced  for  the  fiscal  year  1882  the  following  sums  :  — 

Friction  matches $3,272,258.00 

Patent  medicines,  perfumery,  etc 1,978,395.50 

Bank  checks 2,318,455.14 

Bank  deposits 4,007,701.98 

Savings-bank  deposits 88,400.47 

Bank  capital 1,138,340.87 

Savings-bank  capital 14,729.38 

$12,818,281.40 


222  THE  INTERNAL    REVENUE    SYSTEM 

At  the  same  time  taxes  were  collected  by  the  Treas- 
urer of  the  United  States  from  national  banks  as  fol- 
lows :  — 

On  national-bank  deposits $5,521,927.47 

"   national-bank  capital -137,77-1.90 

Collections  from  national  banks $5,959,702.37 

making  a  total  collection  of  $18,777,983.77. 

As  early  as  1880  the  Commissioner  of  Internal  Rev- 
enue had  advised  the  repeal  of  all  these  taxes,  and  reit- 
erated his  suggestion  two  years  later,1  when  he  further 
advocated  an  abatement  of  forty  per  cent  in  the  special 
license  charges  then  existing  upon  rectifiers,  wholesale 
and  retail  liquor  dealers,  and  tobacconists,  from  which 
an  additional  reduction  in  the  revenues  of  three  million 
dollars  was  expected. 

The  act  of  March,  1879,  had  reduced  the  rate  on 
manufactured  tobacco  by  one-third,  or  from  twenty- 
four  to  sixteen  cents  per  pound ;  and  a  corresponding 
reduction  in  the  rate  on  cigars  would  cause  a  further 
diminution  in  the  revenues  of  $6,716,000,  which  the 
commissioner  also  recommended. 

These  suggestions  were  substantially  followed 2  in  the 
abolition  of  all  adhesive  stamps  imposed  on  matches, 
proprietary  medicines,  perfumes,  and  bank  checks,  the 
abatement  taking  effect  July  1,  1883.  The  duties  on 
bank  deposits  and  capital  ceased  at  the  beginning  of  the 
same  calendar  year ;  while  the  rates  on  tobacco  in  all  its 
forms,  as  well  as  the  special  license  taxes,  were  reduced 
fifty _per  cent.     The  loss  to  the  revenue  from  these  com- 

1  Report  on  Finances,  L882,  p.  To.  -  Act  of  March  3,  1883. 


UNDER    PEACE   CONDITIONS.  223 

bined  abatements  was  variously  estimated  at  from  forty 
to  forty-five  millions,  including  the  $6,000,000  collected 
from  national  banks  by  the  treasurer.  The  loss  fell  much 
short  of  this  estimate,  however,  the  total  decrease  for 
1884  being  less  than  $23,000,000,  a  considerable  gain 
being  manifest  in  spirits  and  other  sources.  The  chief 
loss  lay  in  tobacco,  from  which  the  receipts  fell  from 
$47,391,000  in  1882,  and  $42,101,000  in  1883,  to  $26,- 
062,000  in  1884.  Inasmuch  as  the  collections  of  1882 
were  made  under  the  old  rate  entirely,  and  those  of  1884 
wholly  under  the  new  one,  it  shows  a  falling  off  of 
$21,229,000,  or  nearly  forty-five  per  cent.  When  it  is 
borne  in  mind  that  population  was  increasing  at  the  rate 
of  one  and  a  quarter  millions  per  year,  it  would  seem  to 
indicate  that  the  consumption  of  tobacco  was  but  little 
affected  by  the  tax-rate ;  for  the  increase  in  annual  con- 
sumption after  the  reduced  rate,  as  indicated  by  removal 
from  bond,  was  but  three  and  one-half  million  pounds, 
the  total  withdrawals  being  less  than  the  average  quan- 
tity withdrawn  for  several  preceding  years  at  double 
the  rates.  At  the  same  time  a  perceptible  increase  in 
the  number  of  firms  engaged  in  tobacco  manufacture  was 
remarked,1  a  fact  which  seems  to  indicate  the  tendency 
of  a  high  tax-rate  to  concentrate  the  business  into  a  few 
hands. 

In  1890  another  reduction  of  twenty-five  per  cent  was 
made  in  the  rates  upon  snuff,  chewing  and  smoking 
tobacco,  while  all  special  license  taxes  upon  the  sale  of 
tobacco  were  repealed.2 

The  total  receipts  from  tobacco  in  all  its  forms  for 

1  Report  on  Finances,  1885,  p.  31.  »  Act  of  Oct   1.  1890. 


22-1  TIIE  INTERNAL    REVENUE   SYSTEM 

1893  were  about  $32,000,000,  a  sum  which  would  have 
approximated  $60,000,000  had  the  taxes  existing  in 
1882  been  allowed  to  remain  unchanged.  For  the  same 
year,  the  per  capita  revenue  collected  in  the  United 
States  from  this  subject  was  but  forty-eight  cents,  as 
against  ninety  cents  in  1882,  and  as  opposed  to  $1.71 
in  France,  and  $1.50  in  Great  Britain.  Manifestly 
the  revenues  from  this  source  are  susceptible  of  increase. 
In  recent  years  the  growth  in  the  consumption  of  to- 
bacco has  been  phenomenal.  In  1892  the  per  capita 
consumption  of  smoking  and  chewing  tobacco  was  four 
pounds,  while  the  number  of  cigars  and  cheroots  re- 
turned for  taxation  was  4,548,799,417.  As  compared 
with  other  countries,  the  consumption  of  tobacco  in 
America  is  about  two  and  a  half'  times  as  great  as  in 
England  and  France,  slightly  in  excess  of  that  of  Hol- 
land and  Belgium,  and  somewhat  less  than  that  of 
Germany. 

The  tax  upon  malt  liquors  has  remained  practically 
unchanged  since  the  organization  of  the  system  in  1862, 
namely,  at  $1.00  per  barrel  of  31  gallons.1 

The  following  tables  exhibit  in  detail  the  results  of 
the  experience  which  has  been  portrayed  in  the  past 
chapter,  showing,  for  distilled  spirits :  2  — 

1  In  1886  special  license  and  specific  taxes  were  imposed  on  the 
manufacture  and  sale  of  oleomargarine ;  but,  as  these  duties  were  pro- 
tective in  character,  the  revenue  features  being  merely  incidental, 
they  have  not  been  considered  in  detail  in  the  text  of  the  essay. 

2  These  tables  are  taken  from  Letter  of  Hon.  David  A.  Wells  to 
Hon.  John  J.  G.  Carlisle,  Secretary  of  Treasury,  July  8, 1893,  published 
in  Report  of  Secretary  of  Treasury,  1893,  p.  1100.  They  were  prepared 
from  official  data. 


UNDER   PEACE   CONDITIONS. 


225 


1st.  The  Population  of  the  Country  for  each  Successive  Fiscal  Year  from 
1870  to  1893,  inclusive.  2d.  The  Quantity  of  Gallons  of  Spirits  annu- 
ally taxed.  3d.  The  Average  per  Capita  Consumption  for  each  Suc- 
cessive Year.  4th.  The  Amount  of  Revenue  annually  collected.  5th. 
The  Average  Annual  Revenue,  or  Tax  per  Capita.  6th.  The  Annual 
Tax  per  Gallon.     7th.  The  Average  Tax  per  Gallon. 


year  ending 
June  30  — 

POPULA- 
TION.1 

QUANTITY 
TAXED. 

H  «  H 

&  P  s 

b    3 
& 

REVENUE. 

P       < 
K  03  H 

s  a  r 

>  *  2? 

w  ej  .• 

MS 

1S70  .    .    . 
1871  .    .    . 
1S72  .    .    . 

38,558,371 
39,555,000 
40,596,000 

Gals. 
78,490,198 
62,314,628 
66,235,578 

Gals. 
2.03 
1.58 
1.63 

8. 

39,245,099 
31,157,314 
33,117,788 

8. 

1.02 
.79 

.82 

Cents. 
50 
50 
50 

Cents. 
50 
50 
50 

1873  .    .    . 

41,677,000 

65,911,141 

1.58 

43,131,064 

1.03 

(SI 

65.44 

1874  .    .    . 

1875  .    .    . 

42,796,000 
43,951,000 

62,581,562 
64,425,911 

1.46 
1.47 

43,807,093 
46,877,938 

1.02 
1.07 

70 
(70) 

too/ 

70 
72.76 

1876  .    .    . 

45,137,000 

58,512,693 

1.30 

51,390,490 

1.14 

(70) 
190) 

88.58 

1877  .    .    . 

46,353,000 

58,043,3S9 

1.25 

52,671,291 

1.14 

(70| 
(90  J 

89.97 

1878  .    .    . 

47,598,000 

50,704,189 

1.07 

45,626,533 

.96 

J70J 
(90  J 

89.99 

1879  .     .     . 

48,S66,000 

53,025,175 

1.09 

47,709,464 

.98 

,50 

70 

(90) 

89.98 

1880  .    .    . 

50,155,783 

62,132,415 

1.23 

55,919,119 

1.11 

(70) 
•90  1 

90 

1881  .    .    . 

51,316,000 

69,127,206 

1.34 

62,214,127 

1.24 

(70) 
I  90  J 

90 

1882  .    .    . 

52,495,000 

71,976,398 

1.37 

64,778,756 

1.23 

(70. 
(90) 

90 

1883  .    .    . 
1881  .    .    . 

53,693,000 
54,911,000 

76,762,063 
79,616,901 

1.43 
1.45 

69,085,856 
71,055,211 

1.22 
1.30 

90 
90 

90 
90 

1885  .    .    . 

56,148,000 

69,158,025 

1.23 

62,242,221 

1.23 

(70) 
(90) 

90 

1886  .    .    . 

1887  .    .    . 

1888  .    .    . 

1889  .    .    . 

1890  .    .    . 

1891  .    .    . 

1892  .    .    . 

1893  .    .    . 

57,404,000 
58,680,000 
59,974,000 
61,289,000 
02,622,250 
63,975,000 
65,520,000 
66,826,000 

70,851,355 
67,380,391 
71,565,4S6 
77,163,529 
85,043,336 
88,473,437 
95,045,787 
99.145,889 

1.23 
1.15 
1.19 

1.25 
1.35 
1.38 
1.45 
1.48 

63,766,219 
60,642,351 
64,40S,937 
69,447,175 
76,539,002 
79,626,093 
85,541,209 
89,231,300 

1.11 
1.03 
1.07 
1.13 
1.22 
1.24 
1.31 
1.34 

90 
90 
90 
90 
90 
90 
90 
90 

90 
90 
90 
90 
90 
90 
90 
90 

1  Populatio 

i  for  1870,  18 

80,  and  1890 

from  < 

ensus  ;  otli< 

ir  yeai 

s  calc 

ulated 

by  the  actuary  of  the  Treasury  Department. 


22G 


TUB  INTERNAL    REVENUE   SYSTEM 


A   similar  table   for   fermented   liquors   and    tobacco 
shows  as  follows:  — 


O 

BEER. 

TOBACCO. 

^  Q 

j 

fa    X 

.  O  J    . 

< 

tfl 

P 

"  h 

a  0  « 

fc  -  —  v 

-  =- 

P5 

a  5 

m  ,  0 

-f<3 

< 

3 

E-   S 

h  a  h 

fc  '---A 

z  '- 

»<  "  J 

» 0     0 

S5  - 

w 

O 

5  * 

A  B  ~ 

------ 

a  < 

-   -! 

sags 

JH 

%**% 

>   ~.   ~  ~  H 

>  0 

'/■   T.   < 

>-.  =  ■- 

>  O 

9 

-   -   -    - 
■J.    t 

a  a 

<  -  -- 

-  r  -  -- 
s  0  E  « 

fa 

Gals. 

Gals. 

s 

S 

S 

S 

s 

1863 

33,305,000 

62,105,375 

1.86 

1,058,083 

.05 

(1.00) 

1  .go  ) 

3,097,620 

.09 

1864 

34,046,000 

97,3S2,S11 

2.86 

2,223,719 

.07 

I  ■G0\ 

1 1.00) 

8,592,099 

.25 

I860 

34,748,000 

113,372,611 

3.26 

3,607,181 

.11 

1.00 

11,401,373 

.33 

1866 

35,469,000 

108,569,340 

4.47 

5,115,140 

.14 

1.00 

10,531,008 

.41 

1867 

30,211,000 

192,429,462 

5.31 

5,819,340 

.16 

1.00 

19,7G5,148 

.50 

1868 

36,973,000 

190,540,553 

5.15 

5,GS5,603 

.15 

1.00 

18,730,095 

.51 

1869 

37,756,000 

196,603,705 

5.21 

0,S66,400 

.16 

1.00 

23,430,708 

.62 

1870 

38,508,371 

203,813,127 

5.29 

6,081,020 

.16 

1.00 

31.350.708 

.81 

1871 

39,555,000 

239,91S,060 

6.06 

7,159,740 

.18 

1.00 

33,578,907 

.80 

1S72 

40,590,000 

20S,44i',2:j7 

6.01 

8,009,909 

.20 

1.00 

33,730,171 

.83 

1873 

41,677,000 

298,633,013 

7.10 

8,910,823 

.21 

1.00 

34,386,303 

.83 

1874 

42,790,000 

297,627,807 

6.95 

8,8S0,829 

.21 

1.00 

33,242,876 

.78 

ls7> 

43,951,000 

293,033,607 

6.66 

8,743,744 

.20 

1.00 

37,303,462 

.80 

1876 

45,137,000 

306,972,912 

6.80 

9,159,675 

.23 

1.00 

39,795,340 

.88 

1877 

46,353,000 

304,111,8G0 

6.56 

9,074,305 

.20 

1.00 

41,106,547 

.89 

1878 

47,598,000 

317,485,001 

6.67 

9,473,360 

.20 

1.00 

40,091,705 

.80 

1879 

48,860,000 

314,195,004 

7.04 

10,270,302 

.21 

1.00 

40,135,003 

.82 

1880 

50,155,783 

413,760,441 

8.25 

12,346,077 

.25 

1.00 

38,870,140 

.77 

1881 

01,310,000 

443,641,868 

8.G5 

13,237,700 

.26 

1.00 

42,804,992 

.84 

1882 

52,495,000 

520,514,035 

10.01 

10,680,678 

.30 

1.00 

47,391,989 

.90 

1883 

53,693,000 

550,494.652 

10.25 

16,426,050 

.31 

1.00 

42.104,250 

.78 

1S84 

04,911,000 

5SS,957,1S9 

10.73 

17,573,722 

.32 

1.00 

26,062,400 

.48 

1885 

06,148,000 

594,704,543 

10.59 

17,747,006 

.32 

1.00 

26,407,088 

.47 

1886 

57,404,000 

042.038,923 

11.18 

19,157,612 

.33 

1.00 

27,907,363 

.49 

18S7 

58,6SO,000 

716,767,306 

12.21 

21,3S7,411 

.36 

1.00 

30,108,067 

.01 

1888 

59,974,000 

765,086,789 

12.77 

22,829,202 

.3S 

1.00 

30,662,432 

.03 

1889 

61,289,000 

778,715.443 

12.71 

23,235,863 

.38 

1.00 

31,866,861 

.52 

1890 

62,622,250 

854,420,264 

13.64 

25,494,798 

.41 

1.00 

33,958,991 

.54 

1S91 

63,975,000 

944,823,952 

14.77 

28,192,327 

.44 

1.00 

32,796.271 

.51 

1892 

65,520,000 

986,352,916 

15.05 

29,431,498 

.45 

1.00 

31,000,493 

.47 

1893 

66,826,000 

1,071,183,827 

16.03 

31,003.743 

.48 

1.00 

31,889,712 

.48 

UNDER   PEACE  CONDITIONS.  227 


RECENT    LEGISLATION. 


For  upwards  of  a  decade  previous  to  1893,  America, 
in  the  fulness  of  her  resources,  presented  to  the  world 
of  finance  the  unique  and  almost  isolated  spectacle  of  a 
nation  with  revenues  so  redundant  as  almost  to  defy  ex- 
penditure or  exhaustion ;  of  successive  administrations 
whose  efforts  were  directed,  not  in  devising  means  by 
which  revenues  could  be  collected  with  the  least  possible 
friction  and  inequality,  but  rather  in  spending  almost 
unwelcome  revenues,  in  order  that  their  collection  might 
be  continued;  and  of  a  party  in  power,  to  whom  the 
taxing  machinery  was  an  engine  to  be  employed  prima- 
rily for  the  support  of  an  industrial  policy,  rather  than 
for  supplying  the  legitimate  demands  of  the  state. 

The  fruition  of  this  policy  was  a  deficit  in  the  Treas- 
ury. Not  only  has  the  expenditure  imposed  by  recent 
Congresses  been  in  excess  of  current  revenues,  but  the 
party  called  into"  power  in  1892,  after  many  years  of 
opposition,  has  carried  into  effect  a  policy  of  tariff 
revision  which  has  greatly  increased  the  deficiency.  It 
is  to  be  admitted  that  such  a  reduction  in  the  rates  as 
has  been  effected  by  recent  legislation  may  eventually 
lead  to  the  opposite  result;  for  our  experience  during 
the  reduction  of  the  revenue  system  subsequent  to  the 
war  shows  that  an  increase  in  the  revenues  is  often 
most  surely  obtained  by  a  diminution  of  the  charges, 
especially  those  which  bear  upon  consumption. 

English  experience  displays  this  apparent  paradox 
even  more  strikingly  than  does  our  own.  In  1842, 
when  Eobert  Peel,  by  one  of  those  transcendent  strokes 
of  genius  which  characterized  his  public  life,  undertook 


228  TIIE  INTERNAL   REVENUE   SYSTEM 

the  reform  of  the  revenue  system,  the  budget  had  for 
several  years  shown  a  deficit.  From  1837  to  1842  the 
annual  expenditure  had  exceeded  the  revenues  by  nearly 
forty  million  dollars.  The  trouble  had  become  chronic ; 
and  the  remedy  applied  had  been  to  increase  the  rates, 
with  the  uniform  result  that  the  revenues  diminished 
rather  than  increased.  With  the  reforms  inaugurated 
by  Peel,  however,  which  were  looked  upon  as  chimer- 
ical in  the  extreme,  the  receipts  began  to  recover,  and 
from  that  time  down  to  the  later  modifications  of  the 
revenues  manifested  a  steady  and  continuous  increase. 

The  same  results  may  follow  the  modifications  in 
rates  introduced  by  the  Democratic  party ;  but  for 
some  years  a  deficiency  may  be  expected. 

Shortly  after  its  advent  to  power  in  1893,  the  new 
administration  found  itself  confronted  with  an  unfore- 
seen commercial  depression,  which  caused  a  further 
marked  reduction  in  receipts,  traceable  to  diminished 
demand  for  taxable  commodities.  For  upwards  of  two 
years  now  the  Treasury  has  been  confronted  with  an 
actual  or  approximate  deficiency.  Expenditures  have 
not  been  greatly  diminished,  while  the  customs  and 
internal  revenue  receipts  have  shown  a  marked  falling 
off.  In  the  report  of  the  Treasury  Department  for 
1893  the  estimated  shortage  for  the  fiscal  year  1894 
was  placed  at  twenty-eight  millions.  As  a  matter  of 
fact,  it  was  much  more  than  this ;  and  even  at  the  pres- 
ent time,  with  the  assistance  of  the  measures  extorted 
from  the  reluctant  Fifty-third  Congress,  these  revenues 
show  but  slight  tendency  to  improve. 

This  condition  of  affairs  has  been  viewed  as  but  tem- 
porary, and  traceable  to  the  existing  suspension  of  trade 


UNDER  PEACE  CONDITIONS.  229 

and  general  stagnation  of  industry,  which  a  revival  of 
business  may  be  depended  upon  to  rectify.  But  the 
improvement  has  not  come.  Moreover,  it  is  impossible 
to  calculate,  with  any  degree  of  exactitude,  on  the 
effects  of  a  depression  upon  the  revenues ;  for  our  ex- 
perience during  the  decade  subsequent  to  the  crisis  of 
1873  shows  that  a  depression  may  make  its  influence 
manifest  for  years  after  the  stringency  itself  has  passed 
away. 

This  deficiency,  together  with  the  reorganization  of 
the  tariff  charges,  rendered  recourse  to  other  sources 
necessary;  and  the  problem  proved  a  knotty  one  for 
solution.  Two  avenues  of  relief  lay  open.  Either  new 
taxes,  as  the  income,  corporation,  stamp,  or  license  du- 
ties, might  be  reimposed,  or  the  rates  upon  those  objects 
already  upon  the  schedule,  as  whiskey,  malt  liquors, 
and  tobacco,  might  be  increased.  Experience  has  demon- 
strated that  the  best  fiscal  policy  always  advises  that 
taxation  should  be  so  devised  as  to  allow  the  largest 
possible  freedom  to  the  individual  and  the  greatest 
liberty  to  industry,  and  that  this  is  best  attained  by 
a  concentration  of  the  excise  upon  the  smallest  number 
of  objects  consistent  with  efficiency  of  administration. 
Our  experience  since  the  war  has  led  to  well-nigh  uni- 
versal approval  of  the  taxes  upon  whiskey,  malt  liquors, 
and  tobacco ;  and  few  will  contend  that  the  rates  upon 
these  subjects  are  as  high  as  they  will  bear.  The  tax 
upon  tobacco  has  been  repeatedly  reduced,  and  is  now 
lower  than  in  almost  any  other  country,  while  the  duty 
upon  malt  liquors  is  but  twenty  per  cent  ad  valorem,  or 
about  one-fifth  of  a  cent  per  glass.  As  regards  distilled 
spirits,  Mr.  Wells  has  maintained  that  the  old  rate  (90 


230  THE  INTERNAL   REVENUE   SYSTEM 

cents  per  gallon)  was  the  maximum  one  which  could 
profitably  be  imposed,  and  supported  this  contention  by 
reference  to  the  humiliating  experience  during  the  years 
extending  from  1864  to  1868,  when  the  $2.00  rate  ob- 
tained. But  the  conditions  of  production,  as  well  as  of 
administration,  have  changed  radically  since  that  time. 
No  longer  is  the  service  raw  and  untrained.  Officials 
have  become  familiar  with  the  laws.  Alterations  are 
made  but  infrequently,  and  the  means  for  the  detection 
of  fraud  and  illegal  distillation  have  greatly  improved. 
Moreover,  the  recent  organization  and  successful  conduct 
of  the  so-called  "whiskey  trust"  places  in  the  employ 
of  the  government  a  most  effective  agency  for  the  pre- 
vention of  illicit  distillation ;  for  it  is  manifestly  to  the 
interest  of  this  combination  to  prevent  illicit  distilla- 
tion rather  than  encourage  it,  while  the  eventual  result 
of  this  concentration  of  the  business  into  a  few  hands 
will  be  to  localize  it,  and  render  the  collection  of  the  tax 
a  simple  matter.  The  area  of  illicit  production  is  now 
confined  within  the  mountainous  districts  of  the  South, 
where  the  output  is  comparatively  small,  and  does  not 
enter  into  the  general  market.  Furthermore,  the  capa- 
city of  these  "  moonshine  "  stills  is  inconsiderable,  and 
the  quality  of  the  article  produced  inferior,  so  that  there 
is  little  danger  of  it  entering  into  competition  with  the 
tax-paid  whiskey. 

It  was  therefore  believed  that  the  rate  upon  distilled 
spirits  could  be  materially  increased  without  loss  in  the 
quantity  returned,  while  the  revenues  would  be  increased 
by  many  millions  of  dollars.  Such  was  the  plan  of 
the  Secretary  of  the  Treasury,  who  recommended,  in  his 
first  annual  report,  that  the  deficiency  then  existing  and 


UNDER   PEACE   CONDITIONS.  231 

thereafter  to  exist  be  met  by  an  increase  of  the  rate 
upon  this  subject  from  ninety  cents  to  one  dollar  per 
gallon ;  that  the  duties  upon  cigars  and  cigarettes  be  ad- 
vanced ;  and  that  new  taxes  be  imposed  upon  playing- 
cards,  cosmetics,  perfumeries,  legacies,  and  successions ; 
and  that  a  duty  of  two  per  cent  be  placed  upon  all 
incomes  derived  from  investments  in  the  stocks  and 
bonds  of  private  corporations  and  joint-stock  compa- 
nies.1 From  these  combined  sources  he  felt  that  an  in- 
crease of  fifty  millions  of  dollars  would  accrue  to  the 
Treasury  in  1895. 

In  support  of  his  proposal  for  an  income  tax,  he  very 
truly  says :  "  It  is  a  generally  recognized  fact  that  capi- 
tal in  the  form  of  money,  bonds,  and  other  evidences  of 
debt,  does  not  usually,  by  reason  of  its  intangible  and 
transitory  nature,  bear  its  due  proportion  of  the  burdens 
of  taxation  under  the  revenue  laws  of  the  several  States 
and  municipalities,  as  compared  with  real  estate  and 
visible  personal  property ;  and  while  no  discrimination 
should  be  made  against  it,  whether  it  be  represented 
by  corporate  or  other  investments,  there  appears  to  be 
no  good  reason  why  the  contributions  for  the  support  of 
the  public  service  generally  should  not  be  equalized 
as  nearly  as  possible  by  including  this  kind  of  property 
in  the  federal  revenue  system."  1 

The  proposal  of  the  secretary  contemplated  an  in- 
direct income  tax;  and  by  this  plan  many  of  the  more 
objectionable  features  of  that  tax  would  be  eliminated, 
for  the  individual  citizen  would  be  relieved  from  the 
personal  visits  of  the  assessor,  while  the  possibilities  of 
evasion  would  be  diminished.  By  this  arrangement  all 
i  Report  on  Finance,  1893,  p.  82.  2  Ibid.,  p.  83. 


232  THE  INTERNAL   REVENUE   SYSTEM 

taxes  would  have  been  collected  by  means  of  stoppage 
at  the  source,  the  corporations  deducting  the  tax  before 
dividends  were  announced.  The  duty  falls  upon  the 
eventual  payer  just  the  same  as  if  collected  from  him  in 
person,  without  the  necessity  of  that  scrutiny  into  his 
private  affairs  which  seems  to  be  inseparable  from  the 
income  tax.  During  the  war  this  form  of  collection  was 
applied  to  a  large  class  of  corporations,  and  in  the  fiscal 
year  1865  over  forty  per  cent  of  the  income  tax  was 
turned  into  the  Treasury  through  the  instrumentality  of 
such  corporations.  With  it  extended  to  all  dividend- 
paying  companies,  even  with  the  rate  at  two  per  cent,  it 
is  not  too  much  to  believe  that  the  yield  would  have 
exceeded  the  estimate  of  the  secretary,  who  thought  it 
capable  of  producing  thirty  millions  of  dollars. 

But  Congress  acceded  to  the  report  in  part  only. 
As  to  the  propriety  of  increasing  the  rate  upon  distilled 
spirits,  there  was  but  little  diversity  of  opinion ;  but  the 
proposals  for  the  rehabilitation  of  the  income  tax  aroused 
the  most  bitter  opposition,  and  its  fate  for  a  long  time 
hung  in  the  balance.  The  deficiency  for  the  fiscal  year 
1894  amounted  to  over  forty-three  millions,  instead  of 
twenty-eight  millions  as  estimated  by  the  secretary  ;  and 
it  was  soon  demonstrated  that  this  sum  would  be  nearly 
doubled  ere  the  close  of  the  calendar  year.  'Moreover, 
the  proposed  revision  of  the  tariff  was  expected  to  re- 
duce the  revenues  to  the  extent  of  seventy-five  millions 
more.  So  much  of  this  deficiency  as  was  but  temporary 
was  to  be  met  by  loans ;  but  the  Committee  of  Ways  and 
Means,  in  its  report  to  the  House,  approved  of  the  rec- 
ommendations of  the  secretary  in  so  far  as  they  related 
to  distilled  spirits,  playing-cards,   and  incomes,  except 


UNDER   PEACE  CONDITIONS.  233 

that  the  tax  upon  incomes  was  to  be  collected  from 
individuals  as  well  as  corporations.1 

In  Congress  the  debate  upon  the  proposed  measure 
wore  on  for  over  seven  months,  and  its  fate  for  a  long 
time  was  a  matter  of  conjecture ;  and  eventually  it  be- 
came a  law  without  the  signature  of  the  President,  who 
objected  to  the  tariff  schedule.2 

The  provisions  of  the  measure  relating  to  incomes 
were  modelled  upon  the  later  war  legislation.  They  pro- 
vided that  the  tax  should  be  first  assessed  on  or  before 
the  first  Monday  in  March,  1895,  computed  on  the  in- 
comes received  during  the  year  1894.  The  duration  of 
the  measure  was  limited  to  five  years.  All  persons  hav- 
ing an  income  in  excess  of  thirty-five  hundred  dollars 
were  required  to  make  a  verified  return  to  the  collector, 
as  were  all  persons  acting  in  a  fiduciary  capacity ;  and  in 
estimating  the  income  of  any  person  for  this  purpose 
there  was  to  be  included :  (1)  all  interest  received  upon 
stocks,  bonds,  and  other  securities,  save  such  bonds  of 
the  United  States  as  were  exempt  from  federal  taxation  ; 
(2)  all  profits  realized  within  the  year  from  sales  of  real 
estate  purchased  within  two  years  previous  to  the  close 
of  the  year  for  which  income  is  estimated  ;  (3)  interest 
received  or  accrued  upon  evidences  of  indebtedness, 
whether  paid  or  not,  if  good  and  collectable ;  (4)  the 
amount  of  all  premium  on  bonds,  stocks,  etc.  ;  (5)  the 
amount  of  sales  of  live  stock,  sugar,  cotton,  wool,  butter, 
cheese,  pork,  beef,  mutton,  or  other  meats,  hay  and 
grain,  or  other  vegetable,  or  other  productions,  being  the 

1  See  report  of  committee,  Fifty-third  Congress,  second  session, 
House  of  Representives,  No.  276. 

2  Act  of  Aug.  28,  1S<)4. 


234  THE  INTERNAL   REVENUE   SYSTEM 

produce  of  the  estate,  less  the  amount  expended  in  the 
raising  or  purchase  of  such  produce,  as  well  as  any  part 
consumed  directly  by  the  family ;  (6)  money,  and  the 
value  of  all  personal  property  acquired  by  gift  or  inher- 
itance ;  (7)  all  other  gains,  profits,  and  income  from  any 
source  whatsoever,  except  so  much  as  has  been  already 
taxed  through  the  disbursing  officer  of  the  government 
or  of  a  private  corporation.  In  computing  such  returns, 
however,  the  following  deductions  were  also  permitted 
in  addition  to  the  minimum  exemption  of  four  thousand 
dollars  :  (1)  the  necessary  expenses  actually  incurred  in 
carrying  on  any  business,  occupation,  or  profession  ;  (2) 
all  interest  due  or  paid  within  the  year  on  existing  in- 
debtedness ;  (3)  all  national,  State,  county,  school,  and 
municipal  taxes  ;  (4)  losses  actually  sustained  during 
the  year  incurred  in  trade,  or  arising  from  fires,  storms, 
or  shipwreck,  and  not  compensated  for  by  insurance  or 
otherwise  ;  (5)  debts  ascertained  to  be  worthless.  Xo 
deductions  were  permitted  for  expenditures  for  improve- 
ments. In  case  the  taxable  neglected  or  refused  to 
make  such  return,  the  collector  was  authorized  to  make 
up  a  list  from  the  best  information  available,  and  to  add 
thereto  fifty  per  cent  as  a  penalty,  and  in  case  of  fraud- 
ulent return,  one  hundred  per  cent.  Appeal  therefrom 
was  permitted  to  the  collector  of  the  district,  and  from 
him  to  the  Commissioner  of  Internal  Eevenue. 

The  principle  of  stoppage  at  the  source  was  more 
widely  extended  in  this  measure  than  ever  before ;  and 
all  banks,  trust  companies,  saving  institutions ;  fire,  ma- 
rine, life,  and  other  insurance  companies;  railroads; 
canal,  turnpike,  telephone,  telegraph,  express,  electric- 
lighting,  gas,  water,  street  railway,  companies ;  as  well 


UNDER  PEACE  CONDITIONS.  235 

as  all  other  corporations  or  associations  doing  business 
for  profit  in  the  United  States,  no  matter  how  created 
or  organized  (but  not  including  partnerships),  —  were 
directed  to  deduct  the  tax  of  two  per  cent  upon  all 
profits  and  net  incomes  before  the  payment  of  the  same 
to  stockholders  or  additions  made  to  surplus.  And  net 
profits  for  the  purpose  of  estimating  the  tax  were  to 
include  any  amounts  paid  to  stockholders,  or  carried 
to  the  account  of  any  fund,  or  used  for  improvements 
or  other  investments.1  The  same  principle  was  applied 
to  federal  salaries  in  excess  of  $4,000,  as  well  as  any 
salaries  paid  by  private  corporations  to  their  employees 
in  excess  of  that  sum. 

The  Act  departed  from  earlier  legislation  in  yet  an- 
other and  very  important  particular ;  for  it  forbade  under 
heavy  penalties  the  divulgement  by  the  officers  of  the 
revenue  of  the  incomes,  losses,  or  returns  of  any  taxable, 
whether  a  private  corporation  or  an  individual. 

All  returns  were  to  be  listed  upon  blanks  provided 
for  the  purpose,  on  or  before  the  first  Monday  in  March, 
and  were  to  be  paid  before  the  first  day  of  July  of  each 
year. 

The  law  doubtless  contained  many  imperfections,  and 
in  many  places  was  so  worded  as  to  cause  irritation  to 
the  payer,  and  to  open  wide  the  door  for  evasion,  fraud, 
and  false  swearing.  It  reposed  great  powers,  moreover, 
in  a  politically  appointed  service.     These  imperfections 

1  The  Act  specifically  exempted  all  organizations  of  a  religious, 
charitable,  or  educational  character,  fraternal  or  beneficial  orders! 
building  and  loan  associations,  and  savings-banks  and  insurance  com- 
panies of  a  strictly  mutual  character.  Nor  did  it  apply  to  States, 
counties,  or  municipalities. 


236  THE  INTERNAL   BEVENUE   SYSTEM 

were  particularly  noticeable  in  the  deductions  allowed. 
For  instance,  as  to  what  are  "  necessary  expenses  in- 
curred in  carrying  on  business,"  "  losses  actually  sus- 
tained during  the  year,"  "  debts  ascertained  to  be 
worthless,"  there  lay  a  possibility  of  wide  divergence 
of  opinion.  The  provision  that  corporations  should 
deduct  the  tax  from  the  salaries  of  their  employees 
was  absolute,  notwithstanding  the  fact  that  they  might 
have  been  entitled  to  deductions  which  would  bring 
their  incomes  below  $4,000.  Corporations  were  like- 
wise compelled  to  pay  the  tax  upon  their  net  earnings, 
irrespective  of  whether  the  recipient  of  the  dividends 
had  an  income  of  $4.00  or  $40,000.  Moreover,  the 
collector  was  granted  the  widest  latitude  and  most 
unusual  powers.  He  was  empowered  to  pass  upon  in- 
terest due  and  payable ;  to  increase  the  return  of  the 
individual,  subject,  however,  to  appeal;  and  to  make 
up  a  taxable's  income  from  the  best  information  avail- 
able. These  but  indicate  some  of  the  difficulties  which 
would  have  beset  the  administration  of  the  measure, 
as  well  as  the  individual  honestly  desirous  of  making  a 
fair  return.  Had  we  a  trained  service,  these  objections 
would  lose  much  of  their  seriousness ;  but,  with  col- 
lectors appointed  for  partisan  service  rather  than  merit, 
there  is  reason  to  believe  that  this  power  would  have 
become  a  means  of  unjust  discrimination.  It  certainly 
offered  great  opportunities  for  corrupt  collusion  with  tax- 
payers. 

But  these  objections  were  but  incidental,  and  easily 
corrected.  Was  the  tax  defensible  on  broad  grounds 
of  public  policy,  justice,  and  expediency,  or  did  it  so 
contravene   the  American    spirit  as   to   be   untenable  ? 


UNDER   PEACE  CONDITIONS.  237 

The  desire  to  disguise  taxes  seems  to  inhere  in  democ- 
racy and  government  by  party,  and  leads  to  the  choice 
of  indirect  taxes  rather  than  direct  ones,  whose  inci- 
dence is  more  palpable,  and  which  induce  irritation  and 
party  strife.  At  the  present  time  the  annual  taxes  col- 
lected for  federal  purposes  approximate  $313,000,000. 
Of  this  sum  over  §  152,000,000  is  derived  from  cus- 
toms receipts,  over  $  143,000,000  from  internal  reve- 
nue, and  about  $18,000,000  from  other  miscellaneous 
sources.1  Of  all  the  revenues  collected  for  meeting  the 
annual  expenses  of  the  government,  less  than  two  per 
cent  is  derived  exclusively  from  taxes  upon  realized 
wealth ;  over  ninety-eight  per  cent  falls  upon  consump- 
tion, and  is  taken  mainly  from  the  earnings  of  those 
who  depend  upon  small  incomes  for  their  livelihood. 

In  the  adjustment  of  the  federal  budget,  the  ques- 
tion of  incidence  seems  never  to  have  been  taken  se- 
riously into  account.  The  problem  is  one  of  party 
expediency,  the  aim  being  to  raise  the  revenues  where 
they  will  cause  the  least  outcry.  Our  financial  leaders 
have  not  had  "a  mixed  and  joint  regard  for  the  two 
great  descriptions  of  taxation,  the  attractive  sisters," 
the  direct  and  indirect  taxes,  but  have  wooed  the  latter 
to  the  utter  neglect  of  the  former. 

How  unequal  are  the  resultant  burdens  of  this  dis- 
crimination appears  from  a  contemplation  of  the  inci- 
dence of  such  taxes  as  the  customs  duties  and  those 
levied  on  whiskey,  malt  liquors,  and  tobacco.  Such 
taxes  are  in  their  operation  regressive.2   They  bear  with 

1  These  are  the  receipts  for  1895. 

2  "A  tax  is  said  to  be  regressive  when  the  rate  per  cent  increases 
as  the  property  decreases." — Ely. 


238  THE  INTERNAL   REVENUE   SYSTEM 

greatest  severity  upon  those  least  able  to  sustain  them. 
Consumption  of  staple  commodities  is  not  in  proportion 
to  wealth  or  income.  Taxes  paid  thereon  are  in  like 
manner  per  capita  rather  than  proportional.  Indirect 
taxes,  such  as  the  duties  on  liquors  and  tobacco,  are  in 
effect  exaggerated  poll  taxes,  for  their  incidence  is  not 
only  without  regard  to  the  ability  of  the  payer  to  sus- 
tain them,  but  they  grow  unduly  with  each  intermediate 
transfer,  and  take  and  keep  from  the  pockets  of  the 
payer  much  more  than  they  turn  into  the  Treasury. 

During  the  period  extending  from  1872  to  1894,  the 
federal  government  collected  from  customs  and  inland 
sources  approximately  $7,000,000,000,  of  which  $4,150,- 
630,000  was  produced  by  the  customs,  and  $2,793,930,- 
000  by  the  excise.  The  collections  from  sources  which 
might  be  termed  direct  do  not  merit  mention.  Surely 
there  is  no  crying  hardship,  no  glaring  injustice,  in 
compelling  vested  wealth  and  those  enjoying  large  in- 
comes to  contribute  a  small  percentage  of  the  surplus 
for  the  support  of  the  state,  when  all  other  taxes  dis- 
criminate against  those  having  small  and  precarious 
means  of  livelihood. 

Were  our  State  and  local  taxes  properly  devised, 
these  inequalities  would  be  in  large  part  corrected. 
But  the  reverse  is  more  usually  true.  An  examination 
of  the  assessors'  books  of  any  State  or  city  shows  the 
greatest  inequality  in  the  ratio  of  assessment,  and  the 
discrimination  is  always  against  the  small  holder.  Not 
only  is  his  realty  rated  higher,  but  necessarily  his  tan- 
gible personalty  is  returned  more  fully  and  completely ; 
for  by  crude  methods  of  assessment  it  is  likely  to  be 
rated  at  its  approximate  value,  rather  than  at  a  fraction 


UNDER   PEACE  CONDITIONS.  239 

thereof,  as  is  the  case  of  the  richer  members  of  the 
community. 

AVhen  a  comparison  is  made  between  rural  and  urban 
districts,  similar  conditions  appear.  Intangible  person- 
alty is  returned  in  a  ratio  inverse  to  population,  when, 
as  a  matter  of  fact,  the  great  bulk  of  stocks,  bonds, 
and  credits  are  to  be  found  in  our  cities,  where  from 
one-half  to  nine-tenths  of  it  escapes.  In  the  country 
districts,  on  the  other  hand,  every  man  is  practically  an 
assessor,  and  is  interested  in  the  return  of  his  neigh- 
bor. Fuller  and  more  complete  returns  are  secured, 
and  not  only  tangible,  but  intangible,  personalty  is 
scheduled  at  approximately  its  full  value. 

The  substantial  result  of  both  national  and  local  sys- 
tems of  taxation  is  undue  pressure  upon  small  holdings 
and  incomes,  and  the  disproportionate  shifting  of  the 
burdens  of  government  upon  those  least  able  to  bear 
them.  "We  have  departed  a  long  way  from  the  ideal, 
and  it  makes  little  difference  what  be  our  canon  for  the 
proper  distribution  of  taxes ;  the  present  arrangement 
is  unjust  in  its  incidence,  cumulative  in  its  tendencies, 
and  regressive  in  its  principle. 

The  income  tax  stands  as  a  sort  of  equalizer.  Theo- 
retically satisfying  the  demands  of  equality,  it  should 
occupy  a  position  in  any  complete  and  well-ordered 
fiscal  scheme  to  equalize  the  burdens  of  the  indirect 
taxes  of  our  federal  system,  as  well  as  the  inequalities 
induced  by  legislation,  and  the  faulty  methods  of  assess- 
ment in  vogue  in  our  States.  It  not  only  reaches  vested 
incomes  from  privileges,  as  rent,  but  it  demands  a  share 
of  the  revenues  of  talent  and  ability,  as  well  as  of  such 
intangible  forms  of  wealth  as  escape  local  officials  by 


240  THE  INTERNAL    REVENUE   SYSTEM 

faulty  assessment,  or  by  migration  from  locality  to 
locality.  Nor  can  income  be  hypothecated  at  assess- 
ment days,  and  the  duty  avoided  by  the  incurrence 
of  liabilities,  as  can  the  tax  on  personalty.  Income 
is  usually  a  definitely  ascertainable  amount,  and,  by 
the  honest-intentioned,  the  easiest  of  taxes  to  return. 
Rarely  would  it  be  necessary  to  examine  the  books  of 
a  person  to  verify  returns,  and  the  government  owes 
no  obligation  or  consideration  to  the  dishonest  taxable 
endeavoring  to  elude  the  duties  of  citizenship.  More- 
over, it  demands  contribution  from  individuals  in  ac- 
cordance with  ability,  in  proportion  to  the  revenues 
enjoyed  under  the  protection  of  government.  The  in- 
come tax  would,  moreover,  induce  a  closer  scrutiny  of 
government  expenditures,  and  a  more  careful  surveil- 
lance of  public  servants.  Indirect  taxation  and  extrava- 
gance have  ever  gone  hand  in  hand.  When  government 
touches  the  pocket  of  the  citizen  directly,  however,  it 
induces  a  patriotic  inspection  of  party  stewardship,  and 
a  more  watchful  observance  of  its  action. 

Measured  by  broad  principles  of  equality  and  political 
expediency,  the  income  tax  is  demanded  by  many  con- 
siderations of  public  Avelfare.  Does  it  bear  examination 
equally  well  from  a  practical,  fiscal  point  of  view  ?  If 
it  fails  in  administrative  features,  if  too  costly  of  collec- 
tion, if  it  cripples  industry,  or  is  unjust  in  its  incidence, 
it  can  have  no  permanent  claim  to  public  favor.  And 
upon  no  point  has  the  income  tax  been  assailed  so 
vehemently,  or  denounced  so  bitterly,  as  regards  its 
administrative  features.  It  is  held  to  invade  the  sanc- 
tity of  a  man's  most  personal  affairs,  to  lay  open  to  the 
inquisitive  eye  of  the  official,  and  perchance  the  public, 


UNDER   PEACE  CONDITIONS.  241 

his  income,  and,  in  case  of  inspection,  his  business  meth- 
ods as  well.  It  is,  in  effect,  said  to  be  an  inquisitorial 
tax  par  excellence.  How  little  real  force  this  objection 
has  is  seen  from  the  ease  with  which  the  tax  of  1894 
was  assessed.  The  large  authority  reposed  in  the  collec- 
tors induced  prompt  and  quite  general  compliance  with 
the  law,  while  the  penal  clauses  for  violation  proved  a 
tolerably  thorough  cheek  to  attempted  evasion.  Even 
with  the  tax  assessable  upon  all  save  small  incomes, 
it  would  be  less  inquisitorial  than  the  returns  required 
in  any  one  of  our  States  of  personal  property,  returns 
which  are  usually  open  to  public  inspection.  Those  who 
urge  this  objection  also  fail  to  take  note  of  the  fact  that 
in  the  collection  of  the  taxes  on  distilled  spirits,  the  gov- 
ernment is  the  practical  operator  of  the  still,  while  in 
the  taxation  of  malt  liquors  and  tobacco  the  closest 
supervision  is  maintained. 

Experience  also  shows  the  income  tax  to  be  the  cheap- 
est of  taxes  to  collect.  With  the  possible  exception  of 
the  duties  on  corporations,  which  were  collected  by  the 
internal  revenue  office  at  Washington  direct  from  the 
payer,  the  income  duty  was  one  of  the  most  economical 
of  taxes  which  has  ever  been  imposed.  During  the  war, 
when  the  cost  of  returning  the  inland  revenue  was  be- 
tween three  and  four  per  cent,  the  estimated  cost  of  the 
duty  on  incomes  was  not  in  excess  of  two  per  cent. 
The  reason  is  plain ;  and  this  advantage  would  have  been 
even  more  marked  now  than  then,  for  the  tax  would 
have  been  collected  mainly  from  corporations  direct,  at 
scarcely  any  cost. 


242  THE  INTERNAL   REVENUE  SYSTEM 


THE    CONSTITUTIONALITY    OF    THE    INCOME    TAX. 

But  however  just  and  defensible  the  tax  may  have 
been,  and  however  necessary  to  equalize  the  burdens  of 
federal  taxation,  it  was  to  be  tried  in  another  forum. 
Despite  the  fact  that  the  meaning  of  Sect.  2,  Art.  1, 
of  the  Constitution,  which  provides  "that  representa- 
tives and  direct  taxes  shall  be  apportioned  among  the 
several  States  according  to  their  respective  numbers," 
had  been  interpreted  uniformly  and  unanimously  upon 
several  different  occasions,  and  despite  the  fact  that  the 
meaning  of  direct  taxes  within  the  Constitution,  as  fixed 
by  judicial  determination,  seemed  to  be  limited  to  taxes 
on  land  and  the  capitation  tax,  the  constitutionality 
of  so  much  of  the  measure  of  Aug.  28,  1894,  as  ap- 
plied to  incomes,  was  again  raised.  Three  cases  were 
brought  to  enjoin  the  Commissioner  of  Internal  Eev- 
enue  from  collecting  the  tax,  one  in  the  District  of 
Columbia,  the  other  two  in  New  York.  Both  the  lat- 
ter cases  were  appealed  from  the  decision  of  the  Cir- 
cuit Court  for  the  Southern  District  of  New  York,  which 
had  affirmed  the  law  by  a  divided  court.  The  cases 
were  argued  before  the  Supreme  Court,  March  7,  8,  11, 
12,  and  13,  Attorney-general  Olney  and  Assistant  At- 
torney-general E.  B.  Whitney  appearing  for  the  govern- 
ment; and  Messrs.  Joseph  H.  Choate,  W.  D.  Gurtrie, 
C.  A.  Seward,  B.  H.  Bristow,  David  Willcox,  Charles 
Steele,  and  Charles  F.  Southmayd  for  appellants ;  and 
Herbert  B.  Turner,  J.  C.  Carter,  W.  C.  Gulliver,  and  F. 
B.  Candler  for  appellees. 

Upon  appeal,  the  exceptions  to  the  ruling  of  the  Cir- 
cuit  Court  were   as  follows :    First.    That  the  Act  im- 


UNDER  PEACE  CONDITIONS.  213 

poses  a  direct  tax  iu  respect  of  the  rents,  issues,  and 
profits  of  real  estate,  as  well  as  of  the  income  and 
profits  of  personal  property,  and  not  being  apportioned, 
is  in  violation  of  Sect.  2,  Art.  1,  of  the  Constitution. 

Second.  That  the  law,  if  not  imposing  a  direct  tax,  is 
nevertheless  unconstitutional  in  that  its  provisions  are 
not  uniform  throughout  the  United  States,  and  do  not 
operate  with  the  same  force  and  effect  upon  the  subject 
of  the  tax  wherever  found;  and  in  that  it  provides  ex- 
emptions in  favor  of  individuals  and  copartnerships, 
while  denying  all  exemptions  to  corporations  having 
similar  income  derived  from  like  property  and  values, 
and  provides  for  other  exemptions  and  inequalities  in 
violation  of  Sect.  8,  Art.  1,  of  the  Constitution. 

Third.  That  the  law  is  invalid  so  far  as  imposing 
a  tax  upon  income  received  from  State  and  municipal 
bonds. 

Chief  Justice  Fuller  delivered  the  opinion  of  the 
Court,  and  after  reviewing  the  constitutional  points 
involved,  and  the  previous  determinations  of  the  Su- 
preme Court,  stated  in  part,  as  the  opinion  of  the  major- 
ity of  the  court,  that  it  is  established  :  That  as  taxes  on 
real  estate  belong  to  the  class  of  direct  taxes,  therefore 
any  taxes  on  the  rent  or  income  of  real  estate,  which  is 
the  incident  of  ownership,  belong  to  the  same  class,  and 
that,  therefore,  so  much  of  the  Act  of  Aug.  15,  1894,  as 
attempts  to  impose  a  tax  upon  the  rent  or  income  of 
real  estate  without  apportionment  is  invalid. 

The  Court  was  further  of  the  opinion  that  the  Act 
was  invalid  so  far  as  it  attempted  to  levy  a  tax  upon 
the  income  derived  from  State  or  municipal  bonds,  or 
upon  the  salaries  of  judges  of  the  courts  of  the  United 


244  THE  INTERNAL   REVENUE   SYSTEM 

States.  As  a  municipal  corporation  is  the  representa- 
tive of  the  State  and  one  of  the  instrumentalities  of  the 
State  government,  the  properties  and  revenues  of  muni- 
cipal corporations  are  not  the  subjects  of  federal  taxa- 
tion, nor  is  the  income  derived  from  State,  county,  and 
municipal  securities ;  since  taxation  on  the  interest 
therefrom  operates  on  the  power  to  borrow  before  it 
is  exercised,  and  has  a  sensible  influence  on  the  con- 
tract, and  therefore  such  a  tax  is  a  tax  on  the  power  of 
the  States  and  their  instrumentalities  to  borrow  money, 
and  consequently  repugnant  to  the  Constitution.  And 
the  decree  of  the  Circuit  Court  was  declared  to  be 
reversed  in  respect  only  of  the  voluntary  payment 
of  the  tax  on  the  rent  and  income  of  real  estate,  and 
that  winch  was  held  by  the  trust  companies  in  trust, 
and  on  the  income  from  municipal  bonds  held  or  owned 
by  them. 

Upon  each  of  the  other  questions  argued  at  the  bar, to 
wit :  (1)  whether  the  void  provisions  as  to  rents  and 
incomes   from    real    estate    invalidates   the  whole  Act ; 

(2)  whether  as  to  the  income  from  personal  property  as 
such  the  Act  is  unconstitutional  as  laying  direct  taxes ; 

(3)  whether  any  part  of  the  tax,  if  not  considered  as  a 
direct  tax,  is  invalid  for  want  of  uniformity  on  either  of 
the  grounds  suggested,  —  the  justices  who  heard  the 
argument  were  equally  divided,  and  therefore  no  opin- 
ion was  expressed.  Dissenting  opinions  were  delivered 
by  Justices  "White  and  Harlan.1 

By  this  decision  the  law  was  left  in  an  emasculated 
condition,  and  its  enforcement  would  have  induced  exag- 

1  Pollock  vs.  Farmers'  Loan  and  Trust  Co.  et  al.,  15  Supreme  Court 
Reporter,  pp.  G73-717. 


UNDER   PEACE   CONDITIONS.  245 

gerated  injustice.  Moreover,  it  introduced  intricacies 
and  complications  in  declaring  incomes  and  assessing 
the  tax  which  would  have  rendered  it  most  difficult  of 
collection  and  exceedingly  vexatious  to  the  payer,  and 
would  have  rendered  necessary  countless  legal  proceed- 
ings for  the  determination  of  the  meaning  of  the  law. 

Treasury  officials  had  estimated  the  tax  capable  of 
producing  between  thirty  and  fifty  million  dollars,  and 
the  department  estimated  the  amount  involved  in  the 
opinion  of  the  Court  at  from  fifteen  to  twenty  millions. 

The  argument  was  heard  by  an  incomplete  Court ;  and 
as  the  constitutionality  of  the  entire  measure  had  not 
been  passed  upon,  permission  was  granted  for  a  rehearing. 
This  was  later  heard  by  a  complete  Court,  and  the  law 
decided  by  a  vote  of  five  to  four  to  be  unconstitutional 
in  toto.  This  opinion  is  in  large  part  a  review  of  the 
general  issues  involved  ;  and  as  the  decision  rests  largely 
upon  historic  grounds,  we  venture  to  give  its  substance. 

The  Chief  Justice  discussed  the  reasons  for  the  con- 
stitutional provisions  regarding  direct  taxation.  The 
States  have  plenary  powers  of  taxation,  he  said,  but 
gave  up  the  great  sources  of  revenue  from  commerce, 
and  retained'  the  power  of  levying  taxes  and  duties 
covering  anything  other  than  excises ;  but,  in  respect  to 
the  sources  of  revenue  granted  them,  the  range  of  taxa- 
tion was  further  narrowed  by  the  power  granted  the 
federal  government  over  interstate  commerce.  While 
they  granted  to  the  federal  government  the  power  of 
apportioning  direct  taxation,  they  secured  to  themselves 
the  opportunity  to  pay  the  amount  apportioned  to  them, 
and  to  recoup  from  their  own  citizens  in  the  most  feasi- 
ble way. 


246  THE  INTERNAL   REVENUE  SYSTEM 

"  The  Constitution  ordains  affirmatively,  he  said,  that  repre- 
sentatives and  direct  taxes  shall  be  apportioned  among  the 
several  States  according  to  numbers,  and  negatively  that  no 
direct  tax  shall  be  laid  unless  in  proportion  to  the  enumera- 
tion." 

The  opinion  continued  :  — 

"It  is  said  that  a  tax  on  the  whole  income  of  property  is  not 
a  direct  tax,  in  the  meaning  of  the  Constitution,  but  a  duty.  .  .  . 
We  do  not  think  so.  Direct  taxation  was  not  restricted  in  one 
breath,  and  the  restriction  blown  to  the  winds  in  another." 

The  opinion  next  took  up  the  argument  that  a  tax  on 
the  general  income  of  property  is  not  a  direct  tax  within 
the  meaning  of  the  Constitution ;  and  on  this  point  the 
Court  held  :  — 

"  The  Constitution  prohibits  any  direct  tax,  unless  in  propor- 
tion to  numbers  as  ascertained  by  the  census;  and,  in  the  light  of 
circumstances  to  which  we  have  referred,  is  it  not  an  evasion 
of  that  prohibition  to  hold  that  a  general  unapportioned  tax  im- 
posed upon  all  property  owners,  as  a  body,  for,  or  in  respect  of, 
their  property,  is  not  direct,  in  the  meaning  of  the  Constitution, 
because  confined  to  the  income  therefrom  ?  Whatever  the  specu- 
lative views  of  political  economists  or  revenue  reformers  may  be, 
can  it  be  properly  held  that  the  Constitution,  taken  in  its  plain 
and  obvious  sense,  and  with  due  regard  to  the  circumstances 
attending  the  formation  of  the  government,  authorizes  a  general 
unapportioned  tax  on  the  products  of  the  farm  and  the  rents  of 
real  estate,  although  imposed  merely  because  of  ownership,  and 
with  no  possible  means  of  escape  from  payment,  as  belonging  to 
a  totally  different  class  from  that  which  includes  the  property 
from  whence  the  income  proceeds  ? 

"  There  can  be  but  one  answer,  unless  the  constitutional  re- 
striction is  to  be  treated  as  utterly  illusory  and  futile,  and  the 
object  of  its  framers  defeated.  We  find  it  impossible  to  bold 
that  a  fundamental  requisition,  deemed  so  important  as  to  be 


UNDER   PEACE   CONDITIONS.  247 

enforced  by  two  provisions,  one  affirmative  and  one  negative, 
can  be  refined  away  by  forced  distinctions  between  that  which 
gives  value  to  property,  and  the  property  itself.  Nor  can  we 
perceive  any  ground  why  the  same  reasoning  does  not  apply  to 
capital  in  personalty,  for  the  purpose  of  income  or  ordinarily 
yielding  income,  and  to  the  income  therefrom.  All  the  real 
estate  of  the  country  and  all  its  invested  personal  property  are 
open  to  the  direct  operation  of  the  taxing  power,  if  an  apportion- 
ment be  made  according  to  the  Constitution.  The  Constitution 
does  not  say  that  no  direct  tax  shall  be  laid  by  apportionment  on 
any  other  property  than  land  ;  on  the  contrary,  it  forbids  all  un- 
apportioned  direct  taxes;  and  we  know  of  no  warrant  for  except- 
ing personal  property  from  the  exercise  of  the  power,  or  of  any 
reason  why  an  apportioned  direct  tax  cannot  be  laid  and  as- 
sessed, as  Mr.  Gallatin  said  in  his  report,  when  Secretary  of  the 
Treasury  in  1812,  '  upon  the  same  objects  of  taxation  on  which 
the  direct  taxes  levied  under  the  authority  of  the  State  are  laid 
and  assessed.'   .  .   . 

"  Nor  are  we  impressed  with  the  contention  that,  because  in 
the  four  instances  in  which  the  power  of  direct  taxation  has 
been  exercised,  Congress  did  not  see  fit,  for  reasons  of  expedi- 
ency, to  levy  a  tax  upon  personalty,  this  amounts  to  such  a 
practical  construction  of  the  Constitution,  that  the  power  did  not 
exist,  that  we  must  regard  ourselves  bound  by  it.  We  should 
regret  to  be  compelled  to  hold  the  powers  of  the  general  gov- 
ernment thus  restricted,  and  certainly  cannot  accede  to  the 
idea  that  the  Constitution  has  become  weakened  by  a  particular 
course  of  inaction  under  it. 

"The  stress  of  the  argument  is  thrown,  however,  on  the  as- 
sertion that  an  income  tax  is  not  a  property  tax  at  all  ;  that  it  is 
not  a  real  estate  tax,  nor  a  crop  tax,  nor  a  bond  tax;  that  it  is  an 
assessment  upon  the  taxpayer,  on  account  of  his  money-spending 
power,  as  shown  by  his  revenue  for  the  year  preceding  the  as- 
sessment; that  rents  received,  crops  harvested,  interest  collected, 
have  lost  all  connection  with  their  origin,  and,  although  once  not 
taxable,  have  become  transmuted  in  their  new  form  into  taxable 
subject  matter  ;  in  other  words,  that  income  is  taxable  irrespec- 
tive of  the  source  from  whence  it  is  derived.  .  .   . 


248  THE  INTERNAL   REVENUE   SYSTEM 

"If  it  were  the  fact  that  there  had  been  no  income  tax  law, 
such  as  this,  at  the  time  the  Constitution  was  framed  and  adopted, 
it  would  not  be  of  controlling  importance.  A  direct  tax  cannot 
be  taken  out  of  the  constitutional  rule,  because  the  particular  tax 
did  not  exist  at  the  time  the  rule  was  prescribed.  .  .  .  The 
power  to  tax  real  and  personal  property  and  the  income  from 
both,  there  being  an  apportionment,  is  conceded ;  that  such  a  tax 
is  a  direct  tax  in  the  meaning  of  the  Constitution  has  not  been, 
and  in  our  judgment  cannot  be,  successfully  denied  ;  and  yet  we 
are  thus  invited  to  hesitate  in  the  enforcement  of  the  mandate 
of  the  Constitution,  which  prohibits  Congress  from  laying  a  direct 
tax  on  the  revenue  from  property  of  the  citizen  without  regard  to 
State  lines.  .  .  .  We  are  not  here  concerned  with  the  question 
whether  an  income  tax  be  or  be  not  desirable,  nor  whether  such 
a  tax  would  enable  the  government  to  diminish  taxes  on  con- 
sumption and  duties  on  imports,  and  to  enter  upon  what  may  be 
believed  to  be  a  reform  of  its  fiscal  and  commercial  system. 
Questions  of  that  character  belong  to  the  controversies  of  politi- 
cal parties,  and  cannot  be  settled  by  judicial  decision.  In  these 
cases  our  province  is  to  determine  whether  this  income  tax  on 
the  revenue  from  property  does  or  does  not  belong  to  the  class  of 
direct  taxes.  If  it  does,  it  is,  being  reapportioned,  in  violation 
to  the  Constitution,  and  we  must  so  declare.  .  .  . 

"  "\Ye  have  considered  the  Act  only  in  respect  of  the  tax  on 
income  derived  from  real  estate  and  from  invested  personal  prop- 
erty, and  have  not  commented  on  so  much  of  it  as  bears  on  gains 
or  profits  from  business,  privileges,  or  employments,  in  view  of 
the  instances  in  which  taxation  on  business  privileges  or  employ- 
ments has  assumed  the  guise  of  an  excise  tax,  and  been  sustained 
as  such. 

l-  Being  of  opinion  that  so  much  of  the  sections  of  this  law  as 
lays  a  tax  on  income  from  real  and  personal  property  is  invalid. 
we  are  brought  to  the  question  of  the  effect  of  that  conclusion 
upon  these  sections  as  a  whole.  .  .  .  According  to  the  census 
the  true  valuation  of  real  and  personal  property  in  the  United 
States  in  1890  was  $65,037,091,197,  of  which  real  estate  with  im- 
provements thereon  made  up  $39,54  1,544,333.  Of  course,  from 
the  latter  must  be  deducted,  in  applying  these  sections,  all  un- 


UNDER   PEACE   CONDITIONS.  249 

productive  property,  and  all  property  whose  net  yield  does  not 
exceed  $4,000  ;  but  even  with  such  deductions  it  is  evident  that 
the  income  from  realty  formed  a  vital  part  of  the  scheme  for  tax- 
ation embodied  therein.  If  that  be  stricken  out,  and  also  the 
income  from  all  invested  personal  property,  bonds,  stocks,  invest- 
ments of  all  kinds,  it  is  obvious  that  by  far  the  largest  part  of  the 
anticipated  revenue  would  be  eliminated,  and  this  would  leave 
the  burden  of  the  tax  to  be  borne  by  professions,  trades,  employ- 
ments, or  vocations;  and  in  that  way  what  was  intended  as  a  tax 
on  capital  would  remain  in  substance  a  tax  on  occupations  and 
labor.  We  cannot  believe  that  such  was  the  intention  of  Con- 
gress. We  do  not  mean  to  say  that  an  Act,  laying  by  apportion- 
ment a  direct  tax  on  all  real  estate  and  personal  property  or  the 
income  thereof,  might  not  also  lay  excise  taxes  on  business,  priv- 
ileges, employments,  and  vocations.  But  this  is  not  such  an  Act, 
and  the  scheme  must  be  considered  as  a  whole. 

"  Being  invalid  as  to  the  greater  part,  and  falling,  as  the  tax 
would  if  any  part  were  held  valid,  in  a  direction  which  could  not 
have  been  contemplated  except  in  connection  with  the  taxation 
considered  as  an  entirety,  we  are  constrained  to  conclude  that 
Sects.  27  to  37  inclusive  of  the  Act,  which  became  a  law  with- 
out the  signature  of  the  President  on  Aug.  28,  1894,  are  wholly 
inoperative  and  void. 

"The  conclusions  of  the  Court  are  as  follows:  First.  We  ad- 
here to  the  opinion  already  announced  that  taxes  on  real  estate 
being  indisputably  direct  taxes,  taxes  on  the  rents  or  incomes  of 
real  estate  are  equally  direct  taxes. 

"  Second.  We  are  of  the  opinion  that  taxes  on  personal  prop- 
erty or  on  the  income  of  personal  property  are  likewise  direct 
taxes. 

"  Third.  The  tax  imposed  by  Sects.  27  and  37,  inclusive,  of 
the  Act  of  1894,  so  far  as  it  falls  upon  the  income  of  real  estate 
and  of  personal  property,  being  a  direct  tax  within  the  meaning 
of  the  Constitution,  and  therefore  unconstitutional  and  void, 
because  not  apportioned  according  to  the  representation,  all 
those  sections  constituting  one  entire  scheme  of  taxation  are 
necessarily  invalid. 

"  The  decrees  hereinbefore  entered  in  this  Court  will  be  va- 


250  THE  INTERNAL   REVENUE  SYSTEM 

cated.      The  decrees    below  will    be    reversed,   and    the  cases 
remanded  with  instructions  to  grant  the  relief  prayed."  1 

The  decision  is  perhaps  the  most  important  that  has 
been  handed  down  by  the  Supreme  Court  in  years. 
Not  only  may  the  limitations  which  it  places  upon  the 
powers  of  Congress  seriously  cripple  the  Treasury  in  time 
of  emergency,  but,  as  in  the  Legal  Tender  decisions  and 
the  report  of  the  Electoral  Commission,  it  indicates  the 
extraordinary  powers  which  may  be  wielded  by  one  man 
in  determining  the  fundamental  law  of  the  land.  The 
decision  was  reached  by  a  vote  of  five  to  four  on  the 
final  hearing.  The  judgment  of  one  man  upon  a  contro- 
verted point  was  enough  to  overthrow  the  uniform  decis- 
ions of  the  same  Court,  as  well  as  the  settled- conviction 
of  Congress  and  the  public  for  over  a  century.  With- 
out question  Congress  had  accepted  as  settled  the  mean- 
ing of  the  Constitution  in  this  regard,  and  had  embodied 
its  conviction  in  several  measures.  But  this  fact,  as 
well  as  the  uniform  holdings  of  the  Supreme  Court, 
seems  to  have  had  but  little  weight.  It  must  be 
acknowledged  that  the  doctrine  of  stare  decisis  has 
received  a  severe  blow,  when  a  Court,  whose  claim 
to  honorable  distinction  rests  most  largely  on  the  con- 
sistency of  its  decisions,  gives  no  consideration  to  five 
separate  determinations,  in  which  the  meaning  of  the 
Constitution  is  passed  upon  without  dissent  by  over  a 
score  of  justices  ;  when  the  fact  that  in  one  of  these 
cases  two  of  the  presiding  justices  had  been  members  of 

1  For  full  text  of  the  opinion,  as  well  as  dissenting  opinions  of  Jus- 
tices Harlan,  Brown,  Jackson,  and  White,  vide  Pollock  vs.  Farmers' 
Loan  and  Trust  Company,  et  ah,  15  Supreme  Court  Reporter,  pp. 
912-951. 


UNDER   PEACE  CONDITIONS.  251 

the  Constitutional  Convention  and  were  most  qualified 
to  speak  upon  the  subject,  while  upon  two  other  occa- 
sions, by  a  unanimous  Court,  the  income  tax  had  been 
held  to  be  a  duty,  and  not  a  direct  tax  within  the  mean- 
ing of  the  Constitution.  In  1895,  by  a  majority  of  but 
one  man,  it  is  determined  that  Chief  Justices  Chase  and 
Waite,  and  Justices  Wilson,  Nelson,  Miller,  Strong, 
Bradley,  and  others,  were  in  error,  and  the  dissenting 
voices  of  twenty-three  justices  are  overruled  by  the 
opinions  of  five  men.  Such  a  reversal  of  established 
opinion  could  only  be  warranted  on  the  ground  of  new 
historical  evidence  as  to  the  meaning  of  the  term  "di- 
rect taxes"  in  the  eighteenth  century.  And  this  evi- 
dence was  of  the  most  indirect  kind,  and  was  far  from 
conclusive.  Considerable  material  indicating  the  exis- 
tence of  modified  income  taxes  in  the  colonies  at  the 
time  of  the  adoption  of  the  Constitution  was  introduced 
by  the  appellants'  counsel.  From  other  sources  were 
added  notes  from  correspondents,  fragments  of  debates 
and  controversies,  and  the  subsequently  recorded  opin- 
ions of  members  of  the  Convention.  Yet  this  was  far 
from  convincing ;  and  it  is  quite  as  reasonable  to  suppose 
that  the  framers  of  the  instrument  had  in  mind  I'impot 
unique  of  the  French  Physiocrats,  as  that  they  appre- 
ciated the  administrative  distinctions  followed  by  the 
Court. 

The  fiscal  consequences  of  the  decision  may  be  quite 
as  portentous  as  the  legal  and  political  ones.  While  the 
revenues  are  redundant,  and  the  customs  and  excise  ade- 
quate to  supply  all  possible  current  needs  of  the  govern- 
ment, the  question  is  one  of  but  little  moment.  In  cases 
of  emergency,  however,  the  income  tax  is  most  essential 


252  THE  INTERS AL    REVENUE   SYSTEM 

to  an  adequate  fiscal  policy.  In  time  of  war  the  cus- 
toms duties  are  most  unstable,  as  the  experiences  of  the 
wars  of  1812  and  18G1  give  evidence,  and  cannot  be 
relied  upon  to  satisfy  any  increased  demands  placed 
upon  them.  The  excise  in  like  manner  is  slow  in  yield- 
ing, and  when  imposed  upon  consumable  commodities 
may  work  grievous  injustice.  No  tax  is  so  fitted  for 
emergency  purposes  as  the  income  tax ;  for  its  yield  is 
immediate,  the  receipts  capable  of  expansion  to  meet 
unforeseen  exigencies,  while  its  operations  are  in  no 
sense  obstructive  to  the  freedom  of  industry  and  trade. 

The  result  of  the  decision  deprived  the  Treasury  of 
about  $30,000,000,  about  two-thirds  of  the  sum  needed 
to  satisfy  the  deficit  of  1895,  which  was  something 
less  than  $45,000,000.  The  losses  lay  mainly  in  the 
department  of  internal  revenue,  and  were  traceable  to 
the  large  withdrawals  of  spirits,  taken  from  bond  in  the 
months  previous  to  the  date  when  the  law  of  1894  went 
into  effect,  and  which  greatly  diminished  production  and 
receipts  for  the  following  fiscal  year. 

In  addition  to  the  duty  upon  incomes,  the  measure  of 
Aug.  28,  1894,  provided  for  a  tax  of  two  cents  per  pack 
upon  playing-cards  sold  within  the  United  States  subse- 
quent to  Aug.  1,  1894,  as  well  as  an  increase  of  twenty- 
two  and  one-half  per  cent  in  the  rate  upon  distilled  spir- 
its, or  from  90  cents  to  $1.10  per  gallon,  which  increase 
was  to  be  levied  and  collected  upon  all  spirits  in  bond  at 
the  time  of  the  passage  of  the  Act  or  thereafter  manufac- 
tured. This  provision  differed  from  previous  legislation, 
in  that  the  new  rate  Avas  payable  upon  all  spirits  in  bond 
rather  than  upon  future  production  only.  But,  des- 
pite this  provision,  the  gains  which  accrued  to  specula- 


UNDER   PEACE  CONDITIONS.  253 

tors  were  enormous,  for  it  was  evident  as  early  as  June 
that  the  tax  would  be  increased.  As  a  consequence,  pro- 
duction was  very  active  during  this  period,  and  specula- 
tors and  distillers  withdrew  spirits  in  great  quantities  in 
order  to  anticipate  the  increase  of  the  rate.  During  the 
months  of  July  and  August,  1894,  26,500,000  gallons 
more  of  spirits  were  withdrawn  from  the  bonded  ware- 
houses than  during  the  same  months  of  1893 ;  while 
the  total  withdrawals  during  the  two  months  previous 
to  Sept.  1,  1894,  were  36,554,088.  Upon  these  with- 
drawals the  old  rate  of  90  cents  per  gallon  was  paid, 
with  the  idea  of  holding  the  product  until  the  new  duty 
went  into  effect,  when  the  stock  would  be  disposed  of 
upon  the  basis  of  the  new  rate.  Assuming  that  the  ad- 
vantage which  accrued  upon  withdrawals  during  the 
months  previous  to  July  offset  any  overestimate,  the 
gains  to  distillers  and  speculators  could  not  have  been 
less  than  seven  million  dollars,  all  of  which  should  have 
been  saved  to  the  Treasury. 

The  measure  further  provided  for  an  extension  of 
the  bonded  period  from  three  to  eight  years.  In  the 
past  it  has  been  the  custom  to  collect  the  tax  on  tobacco, 
as  well  as  the  customs  duties,  when  the  commodity 
entered  the  market  for  consumption  ;  but  the  principle 
has  never  been  applied  to  spirits.  The  distiller  has  not 
only  been  required  to  pay  the  highest  rate  of  tax  im- 
posed upon  any  product  under  the  laws,  but  has  been 
compelled  to  pay  the  same  within  a  specified  time,  no 
matter  what  the  demand  for  spirits  or  the  condition  of 
the  market.  This  provision  was  frequently  a  cause  of 
great  hardship  ;  and  while  an  unlimited  bonded  period  is 
not  granted  under  the  present  law,  as  is  permitted  in 


254  THE  INTERNAL   REVENUE   SYSTEM 

tobacco  and  malt  liquors,  it  lias  been  extended  to  eight 
years,  a  provision  which  affords  great  relief  to  producers. 
How  burdensome  the  former  law  was  is  shown  by  the 
large  number  of  failures  which  occurred  among  distillers 
and  holders  of  stock  during  the  early  days  of  the  recent 
commercial  depression. 

From  this  increase  of  the  rate  to  $1.10  a  gallon,  an 
annual  gain  of  twenty  million  of  dollars  is  anticipated 
to  the  revenues. 

The  collections  for  the  past  three  years  from  internal 
sources  have  been  as  follows,  those  for  1895  being  under 
the  revised  rate  :  — 

OBJECTS  OF  TAXATION.  1893.  1894.  1895. 

From  spirits  and  license 
taxes  upon  rectifiers,  man- 
ufacturers, dealers,  etc.     .      $94,720,200      $85,259,252      $79,862,627 

From  tobacco  (chewing  and 
smoking) 31,889,711         28,617,898        29,704,908 

From  fermented  liquors  and 
licenses 32,548,983        31,414,788        31,640,618 

From  oleomargarine    .     .     .  1,670,643  1,723,479  1,409,211 

From  income 77,131 

Banks,  bankers,  etc     ...  2 

Miscellaneous,  —  includ  ing 
penalties,  opium,  playing- 
cards,  etc1 175,390  153,028  551,583 

Aggregate  receipts  ....    $161,004,987    $147,168,447    $143,246,078 
THE    INCIDENCE    OF    THE    INTERNAL    TAXES. 

The  charge  is  not  infrequently  brought  against  the 
excise,  as  it  now  stands,  that,  although  theoretically  a 
tax  upon  luxuries,  it  is   in  reality  a  burden  upon  the 

i  The  tax  on  opium  yielded  §41,000  in  1894,  nothing  in  1895;  and  the  duty 
on  playing-cards  §382,403  in  the  latter  year. 


UNDER   PEACE  CONDITIONS.  255 

wage-receiving  classes.  It  is  these  classes,  it  is  con- 
tended, who  form  the  largest  consumers  of  liquors  and 
tobacco ;  and  it  is  just  this  class  which  it  should  be  the 
first  aim  of  the  government  to  protect.  The  almost 
universal  consumption  of  tobacco  and  malt  liquors  ren- 
ders them,  as  a  matter  of  fact,  a  necessity  to  the  major- 
ity of  the  people ;  and  the  want  is  of  such  an  intense 
order  that  it  is  usually  satisfied  even  before  those  more 
essential  to  comfort.  This  objection  rests  largely  upon 
the  theory  that  all  taxes  upon  commodities  are  eventu- 
ally shifted  to  the  consumer ;  that  any  addition  to  the 
cost  of  production  in  the  form  of  a  tax  is  forthwith 
added  to  price,  and  is  thus  diffused  throughout  the 
community.  The  substance  of  this  argument  is  as  fol- 
lows :  The  manufacturer  who  pays  the  tax  originally 
will  not  deduct  the  same  from  his  profits,  for  in  a  sys- 
tem of  free  competition  they  are  already  at  a  minimum. 
He  therefore  views  it  as  one  of  the  essential  increments 
of  cost  of  production,  and  adds  it  to  price,  together  with 
a  profit  for  the  use  and  advancement  of  capital.  Other- 
wise he  would  cease  producing.  He  cannot  recoup  him- 
self from  labor,  nor  from  the  farmer  who  produces  the 
raw  product.  The  same  process  goes  on  in  the  retail 
transaction,  until  the  enhanced  cost  is  eventually  taken 
from  the  final  payer,  who  consumes  the  product.  But 
this  theory  is  only  true  under  conditions  of  perfect 
competition,  conditions  which,  in  the  subjects  under 
consideration,  do  not  exist ;  for  the  production  and  sale 
of  whiskey,  malt  liquors,  and  tobacco  are,  in  a  measure, 
subject  to  the  laws  of  monopolistic  value.  Now,  mani- 
festly, the  principle  of  diffusion  recognized  to  be  true  in 
conditions  of  free  competition  is  inoperative  here,  inas- 


256  THE  INTERNAL   REVENUE  SYSTEM 

much  as  free  competition  does  not  exist.  Profits  are, 
therefore,  not  regulated  by  the  mean  average  profits  se- 
cured in  other  industries  ;  for  monopoly  price  is  always 
fixed  at  the  point  where  the  largest  sales  and  the  largest 
net  profits  will  be  realized.  The  substantial  truth  of 
this  theory  is  seen  from  an  investigation  of  the  influ- 
ence of  the  changes  of  rate  upon  prices.  During  the 
course  of  the  extraordinary  system  in  operation  during 
the  war,  the  price  of  spirits  sold  over  the  bar  did  not 
vary.  Whether  the  tax  was  two  dollars,  or  fifty  cents, 
a  gallon,  the  retail  price  of  the  article  remained  practi- 
cally the  same.  The  recent  experience  in  regard  to 
tobacco  shows  the  same  phenomena,  the  tax  being  prac- 
tically paid  either  by  the  producer  or  the  dealer.  A 
partial  shifting  of  the  tax  is  brought  about  by  adulter- 
ation and  the  use  of  inferior  grades  of  the  article;  but 
the  unusual  profits  derived  from  the  retail  liquor  and 
tobacco  traffic,  as  seen  from  the  fact  that  a  large  family 
may  be  supported  from  the  income  of  a  small  establish- 
ment, as  well  as  the  practical  concentration  of  the  busi- 
ness of  distilling,  brewing,  and  tobacco  manufacture  into 
a  few  hands,  which  has  taken  place  in  recent  years, 
leads  to  the  belief  that,  unlike  other  commodities  of 
universal  consumption,  the  tax  upon  such  articles  as  we 
are  considering  is,  in  part  at  least,  extracted  from  mo- 
nopolistic profits,  and  is  by  no  means  wholly  shifted 
upon  the  consumer. 

CONSUMPTION    AS    INFLUENCED    BY    TAXATION. 

Reference  has  heretofore  been  made  to  the  influence 
of  taxation  in  determining  prices  and  the  consumption 
of  such  staple  articles  as  food,  clothing,  and  the  like; 


UNDER   PEACE   CONDITIONS.  257 

and  the  inference  was  drawn  that  taxes,  if  heavy,  might 
be  a  factor  of  some  importance  in  determining  the 
standard  of  living  of  a  people.  During  the  debates  in 
Congress,  one  of  the  reasons  most  frequently  urged  for 
the  retention  of  the  two-dollar  rate  upon  distilled  spir- 
its was  the  deterrent  effect  expected  upon  consumption ; 
for  it  is  a  principle  well  recognized  in  economic  science 
that  the  demand  for  any  article  of  general  consumption 
is  more  or  less  dependent  upon  price.  It  is  a  current 
theory,  however,  that  in  certain  articles  for  which  the 
demand  may  be  said  to  be  "  intense,"  this  principle  is 
in  abeyance.  For  such  articles  the  demand  is  said  to 
be  "  inelastic,"  and  varies  but  slightly  with  the  altera- 
tions in  price.  Whiskey,  malt  liquors,  and  tobacco  are 
held  to  be  pre-eminently  of  this  class  of  commodities, 
and  for  this  reason  are  especially  fitted  for  taxation. 

Our  own  experience  seems  to  demand  some  modifica- 
tion of  this  principle ;  for  the  consumption  of  whiskey, 
malt  liquo'rs,  and  tobacco,  as  found  in  the. returns  of  the 
Treasury  Department,  indicate  that  the  duties  are  to 
some  extent  reflected  in  consumption,  although  not  in 
any  exact  ratio. 

But  little,  if  any,  reliance  can  be  reposed  in  the 
statistics  of  production  prior  to  1868,  in  so  far  as  they 
are  indicative  of  the  consumption  of  these  years,  inas- 
much as  evasion  was  so  universal,  and  production  so 
irregular  and  speculative,  that  any  attempt  to  measure 
the  consumption  by  the  amount  returned  for  taxation 
would  be  misleading.  Since  that  date,  however,  the 
reports  offer  data  from  which  surer  inductions  can  be 
made,  although  even  these  returns  must  be  taken  with 
considerable  allowance.     By  reference  to  tables  upon  a 


258  THE  INTERNAL   REVENUE  SYSTEM 

preceding  page,1  it  will  be  seen  that  production  was 
greatly  stimulated  in  the  two  years  immediately  subse- 
quent to  1868 ;  the  per  capita  production  in  1870  being 
2.03  gallons,  and  the  total  tax-paid  product  78,500,000 
gallons. 

From  this  time  on  domestic  production  continued  to 
decline  until  1878 ;  and  the  average  per  capita  consump- 
tion fell  from  2.03  gallons  in  1870,  and  1.58  gallons  in 
1873,  to  1.07  and  1.09  gallons  in  the  fiscal  years  1878 
and  1879  respectively.  With  the  renewal  of  business 
during  the  years  which  followed,  the  annual  taxed  pro- 
duction increased  from  50,704,189  gallons  in  1878  to 
79,616,901  in  1884,  and  the  per  capita  production  in- 
creased during  the  same  years  from  1.07  gallons  to  1.45 
gallons.  During  the  period  from  1871  to  1880,  there  was 
this  marked  reduction,  both  in  the  production  of  the 
country  as  well  as  in  the  amount  consumed  by  the  peo- 
ple ;  and  this,  too,  notwithstanding  an  increase  in  the 
population  of  the  country  during  the  same '  period  of 
thirty  per  cent.  The  tax-rate  was  increased  twice  dur- 
ing this  period,  —  in  1872  to  seventy  cents  per  gallon, 
and  in  1875  to  ninety  cents :  but  it  is  by  no  means  safe 
to  infer  that  the  diminution  in  production,  and  con- 
sequently of  consumption,  is  traceable  to  the  increased 
rate ;  for  a  disturbing  element  enters  in,  in  the  unprece- 
dented commercial  depression,  which,  beginning  in  1873, 
continued  down  almost  to  the  end  of  the  decade,  and 
tended  to  check  the  consumption  of  all  commodities. 

Since  1880,  again,  the  increase  in  the  consumption  of 
spirits  has  been  continuous  and  rapid.  During  the  suc- 
ceeding decade,  with  an  increase  in  the  population  of 
i  See  p.  225. 


UNDER   PEACE   CONDITIONS.  259 

24  per  cent,  the  increase  in  consumption  was  36.8  per 
cent,  or  a  per  capita  consumption  in  1890  of  1.35  gal- 
lons, as  compared  with  1.23  gallons  in  1880.  During 
the  three  years  subsequent  to  1890  the  consumption  has 
increased  at  an  even  more  remarkable  rate,  growing  out 
of  all  proportion  to  the  increase  in  population ;  the  an- 
nual increase  in  tax-paid  production  being  10,000,000 
gallons,  the  per  capita  consumption  in  1893  being  1.48 
gallons.  And  just  as  the  diminution  in  consumption 
during  the  previous  decade  is  attributable  to  general 
economic  and  industrial  conditions,  so  the  increase  re- 
cently recorded  is  due  to  the  very  general  and  widely 
diffused  prosperity  of  the  country.  The  country  was 
growing  rich  at  an  unprecedented  rate ;  wages  were 
high;  redundant  crops,  in  the  face  of  partial  failure  of 
European  harvests,  eased  the  distress  of  the  farmer, 
and  enabled  him,  along  with  the  laborer,  to  improve 
his  condition  of  life,  and  expend  more  on  luxuries. 

It  is,  moreover,  to  be  borne,  in  mind  that  these  figures 
are  only  indicative  of  the  amount  withdrawn  from  bond 
during  these  years,  and  it  is  unsafe  to  assume  that  they 
accurately  represent  consumption;  for,  under  existing 
statutes,  spirits  deposited  in  a  distillery  warehouse  were 
compelled  to  be  withdrawn,  tax  paid,  within  three  years 
from  date  of  entry.  In  the  fiscal  years  1884  and  1885 
taxes  thus  became  due  upon  an  unusual  amount  of 
spirits,  which  were  withdrawn  in  consequence  of  the 
three  years  limitation,  and  without  regard  for  the  de- 
mand for  consumption.  Many  thousands  of  barrels 
were  also  withdrawn  for  export  for  the  same  reason,  in 
subsequent  years  to  be  returned  to  the  United  States 
for  sale.     In  this  way  overproduction  in  years  of  plenty 


260  THE   INTERNAL    REVENUE   SYSTEM. 

has  operated  to  depress  receipts  in  subsequent  years, 
and  to  cause  an  apparent  increase  in  consumption  in 
others.  The  same  disturbing  elements  prevailed  during 
the  years  1890,  1891,  1892,  and  1893,  when  there  was  a 
steady  increase  in  withdrawals  of  tax-paid  spirits,  due 
to  heavy  production  in  the  years  extending  from  1887 
to  1890.  Sporadic  increase  or  decrease  in  withdrawals 
is  not,  therefore,  to  be  attributed  to  increase  in  con- 
sumption, or  loss  from  evasion,  until  all  the  elements 
are  taken  into  account. 

When  allowance  is  made  for  these  influences,  as  well 
as  the  commercial  depression  extending  from  1873  to 
1880,  it  becomes  doubtful  if  any  great  influence  upon 
consumption  can  be  attributed  to  the  slight  alterations 
in  the  rates.  Unquestionably  the  imposition  of  the  two- 
dollar  rate  in  18G4  operated  as  an  effectual  check  to 
household  consumption,  such  as  was  well-nigh  universal 
previous  to  that  time  ;  and  the  rate  has  been  sufficiently 
high  ever  since  to  prevent  its  revival. 

During  the  investigation  of  the  Be  venue  Commission 
in  1865,  testimony  was  taken  upon  this  question  ;  and, 
while  considerable  diversity  of  opinion  was  exhibited 
by  experts  on  the  subject,  the  Commission  held  that  the 
imposition  of  the  heavy  duty  had  undoubtedly  been 
a  potent  influence  in  determining  consumption.  Some 
estimated  the  reduction  in  consumption  for  drinking 
purposes  consequent  upon  the  imposition  of  the  two-dol- 
lar rate  in  1864  as  high  as  seventy-five  per  cent,  while 
others  were  unable  to  recognize  any  perceptible  diminu- 
tion. The  discrepancy  was  due  to  the  difference  in  the 
point  of  view  of  the  observers,  but  it  appeared  conclu- 
sive to  the  Commission  that  a  large  reduction  in  con- 


UNDER    PEACE   CONDITIONS.  261 

sumption  was  observable  on  the  part  of  the  working 
classes.  Previous  to  the  imposition  of  the  tax,  raw 
whiskey  had  been  retailed  at  from  fifteen  to  forty  cents 
per  gallon.  At  this  cost  it  was  possible  for  the  very 
poorest  to  partake  very  freely  of  whiskey  as  a  beverage, 
while  it  Avas  the  custom  of  agriculturists  to  buy  whis- 
key by  the  barrel,  and  to  dispense  it  freely  for  their 
hands  during  the  season  of  harvesting. 

With  the  advance  in  the  price  of  the  article  to  sixty 
cents  per  quart,  and  two  dollars  and  twenty-five  cents 
per  gallon,  such  free  use  was  rendered  impossible ;  and 
while  consumption  over  the  bar  has  possibly  remained 
more  or  less  constant,  the  amount  of  home  consump- 
tion has  perceptibly  diminished.  Along  with  this,  there 
was  observable  an  increase  in  the  consumption  of  malt 
liquors,  which  have  been  quite  largely  substituted  for 
distilled  spirits.1  The  statistics  seem  to  establish  that, 
while  the  original  imposition  of  a  high  rate  had  a 
marked  effect  upon  consumption,  since  1868  the  changes 
in  the  duty  have  not  been  sufficient  to  influence  to  any 
degree  the  price  or  the  demand  for  the  article.  During 
the  last  thirty  years  the  price  of  whiskey  over  the  bar 
has  not  changed  ;  and  if  any  diminution  in  consumption 
has  occurred,  it  lies  in  other  directions. 

It  is  probable,  however,  that  the  increase  in  rate  has 
led  to  adulteration  in  the  quality  of  spirits.  With  whis- 
key obtainable  at  twenty-five  cents  per  gallon,  as  before 
the  war,  the  consumer  was  assured  a  comparatively  pure 
article,  because  the  inducement  to  adulteration  was  but 
slight.     But  with  a  tax  added  thereto  of  from  200  to 

1  Report  of  Revenue  Commission,  p.  12. 


262  THE   INTERNAL   REVENUE   SYSTEM 

400  per  cent,  the  incentives  to  dishonesty  are  too  great 
to  be  resisted. 

A  study  of  the  statistics  of  consumption  of  tobacco 
and  malt  liquors  does  not  materially  modify  these  con- 
clusions; although  it  appears  that  the  demand  for  the 
latter  articles  was  but  little  affected  by  the  commercial 
depression  of  1873,  as  the  consumption  increased  at  a 
pretty  uniform  rate  during  these  years. 


CONCLUSION.  263 


CONCLUSION. 

Such  is  the  history  of  the  internal  revenue  system, 
from  its  inauguration  by  Hamilton  over  one  hundred 
years  ago,  down  to  the  present  time.  It  has  now  become 
a  recognized  and  essential  portion  of  our  financial  order, 
and  there  is  no  possibility  that  it  will  soon  be  aban- 
doned. 

Upon  this  basis  and  under  ordinary  conditions,  it  is 
above  reproach  from  an  economic  standpoint,  Avhile  no 
department  of  the  government  is  administered  with 
greater  fidelity,  or  is  freer  from  reproach.  However 
faulty  it  may  have  been  at  the  period  of  its  greatest 
extension,  when  the  necessities  of  life  formed  the  prin- 
cipal sources  of  revenue,  the  same  objections  cannot  now 
be  urged  against  it,  reduced  as  it  is  to  the  smallest  pos- 
sible compass,  and  based  only  upon  those  articles  recog- 
nized quite  universally  as  deleterious  both  to  the  morals 
as  well  as  the  social  well-being  of  the  community.  At 
the  present  time  frauds  have  practically  ceased,  save  in 
the  outlying  districts ;  and  even  these  are  rapidly  being 
brought  under  federal  supervision  by  the  improvement 
of  the  means  of  transportation,  and  the  encroachment  of 
civilization  into  the  heretofore  sparsely  populated  dis- 
tricts. 

As  to  the  position  which  the  excise  will  occupy  in  the 
future  it-  is  idle  to  conjecture.  With  the  return  of  good 
times  and  the  increase  of  customs  revenue,  certain  por- 


26-1  THE  INTERNAL   REVENUE   SYSTEM. 

tions  of  it  may  be  relinquished ;  but,  in  some  form  or 
other,  it  is  safe  to  assume  that  it  will  always  perform  a 
substantial  service  in  our  budgetary  arrangement. 

And  in  view  of  the  recent  necessities  of  the  Treasury, 
and  the  possible  prospective  demands  for  an  increase  of 
the  revenues,  owing  to  the  determination  of  the  Supreme 
Court  in  regard  to  the  income  tax,  it  becomes  a  matter  of 
present  interest  to  take  stock  of  our  resources.  It 
would  seem  advisable,  in  case  further  reliance  upon  in- 
land sources  be  found  necessary,  to  look  for  the  same 
from  an  increase  in  the  rates  on  malt  liquors  and  tobacco. 
The  consumption  of  the  former  article  as  a  beverage  has 
of  late  years  increased  at  a  phenomenal  rate,  the  quan- 
tity taxed  per  capita  having  doubled  during  the  thirteen 
years  subsequent  to  1880. *  Since  1863,  when  the  duty 
was  first  imposed,  the  amount  returned  for  taxation  has 
increased  from  62,000,000  gallons  to  1,071,000,000  gal- 
lons, or  an  increase  in  the  per  capita  consumption  of 
from  1.86  gallons  in  the  former  year  to  16.03  gallons  in 
1893.  During  the  same  years  the  revenues  have  in- 
creased from  $1,558,000  in  1863  to  $32,500,000  in  1893, 
while  illicit  manufacture  is  so  difficult,  owing  to  the 
fact  that  large  and  expensive  plants  are  essential  to 
production,  that  evasion  may  now  be  said  to  be  non- 
existent. What  little  fraud  does  exist  is  traceable  to 
the  re-use  of  stamps  which  have  never  been  properly 
cancelled.  Further  reasons  which  indicate  this  com- 
modity as  especially  fitted  for  further  taxation  is  the 
low  rate  now  existing  upon  it,  — i.e.  one  dollar  per  barrel, 
or  approximately  twenty  per  cent  ad  valorem,  —  and  the 

1  In  1S80  the  consumption  was  8.25  gallons  per  capita  :  in  1893, 16.03 

gallons. 


CONCLUSION.  265 

large  profits  accruing  from  the  manufacture  and  sale. 
It  has  been  estimated  that  the  average  cost  of  beer  over 
the  counter  is  not  in  excess  of  one  and  three-fourth  cents 
per  glass,  upon  which  a  tax  of  one-fifth  of  one  cent  per 
glass  is  levied.  An  increase  of  the  tax  to  double  this 
amount,  or  to  $2.00  per  barrel,  would  be  borne  with 
comparative  ease,  the  quality  of  the  article  would  not 
thereby  suffer,  while  the  revenue  would  be  increased  to 
upwards  of  sixty  millions  a  year. 

The  duties  upon  cigars  and  tobacco  are  likewise  lower 
in  the  United  States  than  in  almost  any  other  country. 
In  1890  all  license  taxes  for  the  privilege  of  sale  were 
removed,  and  the  rates  reduced  to  a  uniform  tax  of  six 
cents  per  pound  upon  manufactured  tobacco,  and  to  $3.00 
per  1,000  upon  cigars,  regardless  of  quality.  With  these 
rates  increased  one  hundred  per  cent,  the  revenues  could 
doubtless  be  augmented  to  sixty  million  dollars ;  with 
the  same  rates  imposed  as  prevail  in  Great  Britain,  to 
eighty -five  millions ;  and  with  those  levied  in  France, 
to  one  hundred  and  twelve  millions. 

The  total  revenue  from  the  three  sources  of  distilled 
spirits,  malt  liquors,  and  tobacco  is  now  something  over 
$141,000,000,  a  sum  which  could  with  comparative  ease 
be  increased  to  $200,000,000.  With  such  a  balance- 
sheet  as  this,  and  with  such  an  unparalleled  showing  of 
resources,  no  apprehension  need  be  felt  for  the  future ; 
for  it  is  safe  to  assert  that  contemporary  budgetary  his- 
tory makes  no  like  exhibit  of  unopened  resources  and 
unemployed  powers. 

Whatever  may  be  the  contingencies  which  arise,  and 
induce  greater  dependence  upon  the  internal  revenue  sys- 
tem, any  reasonable  revenues  can  be  secured  from  inland 


266  THE  INTERNAL   REVENUE   SYSTEM. 

sources  without  impairment  of  our  industrial  vigor,  or 
even  the  creation  of  appreciable  burdens.  Our  ability 
to  sustain  taxation,  even  the  most  onerous  and  vexatious, 
was  abundantly  demonstrated  during  the  war ;  and  since 
that  time  the  rapidity  of  our  industrial  progress,  as  well 
as  our  growth  in  resources  and  opulence,  has  been  un- 
paralleled in  the  history  of  nations.  While  other  coun- 
tries, confronted  with  bankruptcy  and  a  tax-burdened 
people,  are  vexed  with  the  problems  of  expanding 
indebtedness  and  increasing  tax-rates,  America  stands 
almost  alone  in  the  family  of  nations,  Avith  a  debt  whose 
extinction  is  only  a  matter  of  a  few  years. 

At  the  present  time  our  federal  revenue  system  bears 
so  lightly  as  to  arouse  scarcely  a  ripple  of  dissatisfaction ; 
while  the  internal  taxes  alone,  reduced  as  they  are  to 
small  compass  and  levied  at  moderate  rates,  ordinarily 
produce  to  the  Treasury  sufficient  revenues  to  satisfy 
the  expenditures  on  behalf  of  the  civil  establishment, 
together  with  the  war,  navy,  and  Indian  departments. 

It  is  safe  to  assert  that  the  records  of  modern  his- 
tory find  no  parallel  to  such  a  display  of  resources 
by  a  great  nation. 


APPENDICES. 


APPENDIX   I. 


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Public  Debts.     New  York. 
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University  Studies,  Vol.  II. 
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Public  Finance.  London, 
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Bolles,  A.  S. 

Financial  History  of  the 
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Cooley,  Thomas  M. 

A  Treatise  on  the  Law  of 
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269 


270 


APPENDIX  I. 


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APPENDIX   1. 


271 


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Progressive  Taxation,  in 
Theory  and  Practice.  Pub- 
lications American  Eco- 
nomic Association,  Vol.  IX., 
Nos.  1  and  2.  Baltimore, 
1894. 

The  Shifting  and  Incidence 
of  Taxation.  Publications 
American  Economic  Asso- 
ciation, Vol.  VII.,  Nos.  2 
and  3.     Baltimore,  1892. 

Sherman,  John. 

Speeches  and  Reports  on 
Finance  and  Taxation.  New 
York,  1879. 

Smith,  Adam. 

An  Enquiry  into  the  Na- 
ture and  Causes  of  the 
Wealth  of  Nations. 

Sumner,  W.  G. 

Robert  Morris,  the  Finan- 
cier, and  the  Finances  of  the 
American  Revolution.  New 
York,  1891. 

TOOKE. 

History  of  Prices. 


Von  Holst,  Dr.  H. 

Constitutional  History  of 
the  United  States.  Chicago, 
1879. 

Weeden,  W.  B. 

Economic  History  of  New 
England.     Boston,  1890. 

Wells,  David  A. 

Recent  Financial,  Indus- 
trial, and  Commercial  Expe- 
riences of  the  United  States. 
Cobden  Club  Essays,  series 
2,  1871-1872.    London,  1872. 

Taxation  of  Distilled  Spir- 
its, Our  Experience  in  the. 
Princeton  Beview,  N.  S.,  Vol. 
XIV. 

West,  Max. 

The  Inheritance  Tax. 
Studies  in  History,  Econom- 
ics and  Public  Law,  edited 
by  University  Faculty  of 
Political  Science  of  Colum- 
bia College.  New  York, 
1893. 

Wilson,  A.  J. 

The  National  Budget. 
London,  1S82. 

Wolf,  D.  J. 

Die  Brantweinsteuer,  Fi- 
nanz  Archiv,  1887. 


272 


APPENDIX    1. 


Official  Documents. 


American  State  Papers  ;  An- 
nals of  Congress  ;  Congres- 
sional Record  and  Globe; 
Journal  of  Continental  Con- 
gress. 

Report  of  Commission  ap- 
pointed for  the  Revision  of 
the  Revenue  System  of  the 
United  States.  Washington, 
1866. 


Reports  on  Finance  for  the 
years  1811  to  1817  and  1860 
to  1895.     Washington. 

Reports  of  Special  Commis- 
sioner of  the  Revenue  for 
the  years  of  1866,  1867, 
1868,  and  1869.  Washing- 
ton. 


APPENDIX  II. 


273 


APPENDIX   II. 


Schedule  of  Internal  Revenue  Duties,  from  1862  to  1867. 


A.    Corporations,  on  Gross  Receipts,  and  Personal  Income  Taxes. 


Objects  of  Taxation. 

O 
< 

» 

P,  '$■ 

O 

< 

B 

o 
< 

O 
0 

►J  ti 

O 
< 

H 
O 
< 

Railroads  and  Steamboats 
worked  by  steam     .     .     . 

Railroads  and  Ferry  Boats 
not  worked  by  steam  .     . 

Bridges  Toll 

% 

3 

H 

3 

7c 

3 

li 
3 

1 

o 

3 

2£ 

% 
3 

5 

li 
3 

o 

% 

% 

2i 

2£ 

3 

3 

5 
3  %   on  re- 
ceipts in  ex- 
cess of  $1,000. 

Repealed 

Repealed 

2£ 

Insurance  Companies     .     . 

1 

O 

Toll  Roads  and  Bridges 
Ferry  Boats 

Ik 

o 

H 

1  Act  July  1,  18G2.  —  3  per  cent  on  excess  of  $600;  5  per  cent  on  excess 
of  $10,000;  1£  per  cent  on  incomes  from  United  States  securities  ;  5  per  cent 
on  incomes  of  United  States  residents  abroad. 

Act  June  30,  1864.  —5  per  cent  on  incomes  between  $600  and  $5,000  ;  7J 
per  cent  on  incomes  between  $5,000  and  $10,000  ;  10  per  cent  on  incomes 
in  excess  of  $10,000.  Discrimination  in  favor  of  United  States  securities 
repealed. 

Act  Mab.  3,  1865.  —  5  per  cent  on  incomes  between  $600  and  $5,000 ;  10  per 
cent  on  all  incomes  in  excess  of  $5,000. 

Act  Mar.  2, 1867.  —5  per  cent  on  all  incomes  in  excess  of  $1,000. 


274 


APPENDIX   II. 


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APPENDIX   II. 


275 


Stamp-Taxes  on  Instruments,  Acts,  and  Evidences. 


Any  agreement,  per  sheet 

Bank  Check 

Bills  of  Exchange,  Inland 

Bills  of  Exchange,  Foreign 


Bills  of  Lading 

Express  Receipt 

Bond 

Bond  of  Indemnity  .     .     .     . 

Certificate  of  Stock  .     .     .     . 

Other  Certificate 

Charter  Party  ....'.. 

Contracts,  bills  of  sale,  bro- 
ker's note  of  sale      .    .    . 

Conveyance  of  Real  Estate 
when  consideration  does 
not  exceed  $500  .     .     .     . 

Conveyance  —  Consideration 
from  $500  to  $20,000     .     . 

Conveyance  —  Consideration 
in  excess  of  $20,000.  On 
each  $10,000 

Telegraph  Despatch      .     .     . 

Bill  of  Entry 

Insurance  Policy,  according 
to  amount  of  insurance    . 

Lease 


Manifest 

Mortgage  (up  to  $10,000)   .     . 

Mortgage.      Consideration 

$10,000  to  $20,000     .     .     . 

Mortgage,  each  add'al  $10,000 

Passage  Ticket 

Power  of  Attorney    .     .     .     . 

Probate  of  Will 


Protest 

Receipts  of  Money  .  .  , .  . 
Warehouse  R'^pipt  .  .  .  . 
Legal  Doc  .... 

Writ  for  Col    ^ence'o  of  Suit 


Act  July  1,  1S62. 


50. 

In  excess  of  $20,  2c. 

At  rate  of  5c  per  $100. 

Below  $150, 3c,  above 
$150  at  a  propor- 
tional rate. 

100. 

10  to  50. 
250  and  500. 

250. 

20  to  250. 

$3.00  to  $10.00 


100. 

500. 

$1.00  to  $20.00. 

$20.00. 
10  to  30. 
500  to  $1.00. 

250  to  $1.00. 
500  to  $1.00. 

$1.00  to  $5.00. 

Same  as  conveyances 


$15.00. 
$10.00. 
500  to  $1.00. 
250  to  $1.00. 

500  to  $20.00. 

250. 


250. 


50? 


2< 


_    XT. 

o.2 


Act  June  30,  ISfl-t. 


500  to  $1.00. 

100  to  250. 
$1.00  to  $10.00. 


At  rate  of  50c.   for 
each  $500. 


At  rate  of  50c.   for 
each  $500. 

250  to  $1.00. 


At  50c.  for  each  $200 
of  rent  in  excess 
Of  $300. 


50c.  on  every  $500 
of  Consideration. 


500  to  $1.00. 
250  to  $1.00. 

$1.00,  and  50c.  on 
each  $1,000  in  ex- 
cess of  $2,000. 

250. 
20.- 
100  to  250. 

50<*. 


In  the  Acts  of  Mar,  3,  1865,  July  13,  1SCG,  Mar.  2,  1867,  no  important 
changes  were  made, 


276 


APPENDIX  II. 


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APPENDIX  II. 


277 


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APPENDIX  III.  281 


B.    Acts  Imposing  Tax  on  Fermented  Liquors  and  Rates  of  Tax. 

Pee 

Bakrel. 

From  September,  1862,  to  March  3,  1863  (act  July  1, 
1862) .' $1.00 

From  March  3, 1863,  to  March  31, 1861  (act  March  3, 
1863) 60 

From  April  1,  1864 1.00 

The  act  of  March  3,  1S03,  provided  that  the  tax  on  fermented 
liquors  should  be  60  cents  per  barrel  from  the  date  of  the  passage 
of  that  act  to  April  1,  1864.  Hence,  the  tax  of  60  cents  per  barrel 
having  expired  by  limitation,  April  1,  1804,  the  tax  of  $1  per  bar- 
rel, under  act  of  July  1,  1802,  was  again  revived,  which  rate  has 
continued  in  force  under  different  acts  since  that  date. 

The  act  of  July  13,  1866  (14  Stat.,  9S),  changed  the  mode  of 
assessing  and  collecting  the  tax  on  fermented  liquors,  and  made 
the  tax  on  them  after  Sept.  1,  1866,  payable  by  stamps. 

A  deduction  of  lh  per  cent  is  allowed  on  the  tax  upon  fer- 
mented liquors,  making  this  tax  in  effect  92^  cents  per  barrel. 


OR  9 


APPENDIX  111. 


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286  APPENDIX  IV. 


APPENDIX   IV. 


Schedule  of  Articles  and  Occupations  subject  to  Tax  under  the 
Internal  Revenue  Laws  of  the  United  States  in  Force  August  28, 
1894. 

SPECIAL   TAXES. 

Kate  of  Tax. 

Rectifiers  of  less  than  500  barrels  a  year $100.00 

Rectifiers  of  500  barrels,  or  more,  a  year 200.00 

Retail  liquor-dealers 25.00 

Wholesale  liquor-dealers 100.00 

Retail  dealers  in  malt  liquors 20.00 

Wholesale  dealers  in  malt  liquors 50.00 

Manufacturers  of  stills 50.00 

and   for  stills  or  worms,  manufactured, 

each 20.00 

Brewers,  annual  manufacture  less  than  500  barrels      .     .  50.00 

annual  manufacture  500  barrels  or  more   .     .     .  100.00 

Manufacturers  of  oleomargarine 600.00 

Retail  dealers  in  oleomargarine 48.00 

Wholesale  dealers  in  oleomargarine 480.00 

DISTILLED   SPIRITS,    ETC. 

Distilled  spirits,  per  gallon 1.10 

Wines,  liquors,  or  compounds  known  or  denominated  as 
wine,  and  made  in  imitation  of  sparkling  wine  or 
champagne,  but  not  made  from  grapes  grown  in  the 
United  States,  and  liquors,  not  made  from  grapes, 
currants,  rhubarb,  or  berries  grown  in  the  United 
States,  but  produced  by  being  rectified  or  mixed 
with  distilled  spirits  or  by  the  infusion  of  any  matter 
in  spirits,  to  be  sold  as  wine,  or  as  a  substitute  for 
wine,  in  bottles  containing  not  more  than  one  pint, 
per  bottle  or  package -10 


APPENDIX  IV.  287 

Rate  of  Tax. 

Same,  in  bottles,  containing  more  than  one  pint,  and  not 

more  than  one  quart,  per  bottle  or  package  ....  $  0.20 

And  at  the  same  rate  for  any  larger  quantity  of  such 
merchandise,  however  put  up,  or  whatever  may  be 
the  package. 

Stamps  for  distilled  spirits  intended  for  export,  for  ex- 
pense, etc.,  of,  each 


10 


TOBACCO   AND   SNUFF. 

Tobacco,  chewing  and  smoking,  fine-cut,  cavendish,  plug 
or  twist,  cut  or  granulated,  of  every  description; 
tobacco  twisted  by  hand  or  reduced  into  a  condition 
to  be  consumed,  or  in  any  manner  other  than  the 
ordinary  mode  of  drying  and  curing,  prepared  for 
sale  or  consumption,  even  if  prepared  without  the 
use  of  any  machine  or  instrument,  and  without  being 
pressed  or  sweetened ;  and  all  fine-cut  shorts  and 
refuse  scraps,  clippings,  cuttings,  and  sweepings  of 
tobacco,  domestic  or  imported,  per  pound     ....  .06 

Snuff,  of  all  descriptions,   domestic   or  imported,  and 

snuff-flour,  sold  or  removed  for  use,  per  pound ...  .06 

CIGARS   AND   CIGARETTES. 

Cigars  and  cheroots,  of  all  descriptions,  domestic  or  im- 
ported, per  thousand 3.00 

Cigarettes,   domestic    or  imported,   weighing  not   over 

three  pounds  per  thousand,  per  thousand      ....  .50 

Cigarettes,  domestic  or  imported,  weighing  over  three 

pounds  per  thousand,  per  thousand 3.00 

FERMENTED    LIQUORS. 

Fermented  liquors,  per  barrel,  containing  not  more  than 

31  gallons 1  1.00 

And  at  a  proportionate  rate  for  halves,  thirds,  quarters, 
sixths,  and  eighths  of  barrels. 

More  than  one  barrel  of  31  gallons,  and  not  more  than  63 

gallons,  in  one  package 2.00 

1  A  deduction  of  Ih  per  cent  is  now  allowed  on  the  sale  of  stamps  for  fer- 
mented liquors,  which  reduces  this  rate  to  92J  cents  per  barrel. 


288  APPENDIX  IV. 


OLEOMARGARINE. 


Rate  of  Tax. 


All  substances  heretofore  known  as  oleomargarine,  oleo, 
oleomargarine-oil,  liutterine,  lardine,  suine,  and  neu- 
tral ;  all  mixtures  and  compounds  of  oleomargarine, 
oleo,  oleomargarine-oil,  butterine,  lardine,  suine,  and 
neutral ;  all  lard  extracts  and  tallow  extracts ;  and 
all  mixtures  and  compounds  of  tallow,  beef-fat,  suet, 
lard,  lard-oil,  vegetable-oil,  annotto,  and  other  color- 
ing matter,  intestinal  fat,  and  offal  fat  made  in  imi- 
tation or  semblance  of  butter,  or  when  so  made, 
calculated  or  intended  to  be  sold  as  butter  or  for 
butter,  domestic,  per  pound $0.02 

Same,  imported  from  foreign  countries,  per  pound      .     .  .15 

OPIUM. 

Prepared  smoking  opium,  per  pound  .     .  ' 10.00 

BANKS  AND  BANKERS,  OTHER  THAN  NATIONAL. 

Circulation    issued  by  any  bank,   etc.,   or  person,   per 

month is  of  1  p.  ct. 

Circulation  exceeding  90  per  cent  of  capital,  in  addition, 

per  month I  of  1  p.  ct. 

Banks,  etc.,  on  amount  of  notes  of  any  person,  State 
bank  or  State  banking  association,  used  for  circula- 
tion and  paid  out 10  per  cent. 

Banks,  etc.,  bankers,  or  associations,  on  amount  of  notes 
of  any  town,  city,  or  municipal  corporation,  paid  out 
by  them 10  per  cent. 

Every  person,  firm,  association  other  than  national-bank 
associations,  and  every  corporation,  State  bank,  or 
State  banking  association,  on  the  amount  of  their 
own  notes  used  for  circulation  and  paid  out  by  them,  10  per  cent. 

Every  such  person,  firm,  association,  corporation,  State 
bank,  or  State  banking  association,  and  also  every 
national  banking  association,  on  the  amount  of  notes 
of  any  person,  firm,  association,  other  than  a  national 
banking  association,  or  of  any  corporation,  State 
bank,  or  State  banking  association,  or  of  any  town, 
city,  or  municipal  corporation,  used  for  circulation 
and  paid  out  by  them 10  per  cent. 


APPENDIX  IV.  289 


PLAYING-CARDS. 

Rate  of  Tax. 
Playing-cards,  per  pack,  containing  not  more  than  fifty- 
four  cards     $0.02 

Note.  —  The  internal  revenue  taxes  on  imported  manufac- 
tured tobacco,  snuff,  cigars,  and  cigarettes  are  in  addition  to  the 
import  duties  thereon. 

The  only  taxes  under  the  laws  now  in  force  not  payable  by 
stamps  are  as  follows  :  — 

Tax  on  deficiencies  in  production  of  spirits. 

Tax  on  excess  of  materials  used  in  production  of  spirits. 

Tax  on  circulation  of  banks  and  bankers. 

Tax  on  notes  paid  out  by  banks  and  others. 

Penalties  of  50  per  cent  and  100  per  cent. 


200 


APPENDIX    V. 


Table  showing  Receipts  from  each  Specific  Source  of 


ARTICLES  AND  OCCUPATIONS. 


FISCAL  YEARS  ENDED  JUNE  ; 


Distilled  spirits 

Tobacco,  cigars,  snuff,  etc 

Fermented  liquors 

Banks  and  Bankers 

Penalties,  etc 

Adhesive  stamps 

Manufactures  and  products  of  iron, 
wood,  glass,  paper,  cotton,  wool, 
leather,  oils,  gas,  mineral  products, 
etc 

Gross  receipts,  — 

Advertisements,  canal,  express,  ferry, 
railroad,  insurance,  telegraph  com- 
panies, theatres,  museums,  etc.  .    . 

Sales,  — 

Auction,  broker,  apothecary,  butcher, 


1863. 


5,176,530.50 
3,097,620.47 
1,628,933.82 


27,170.14 
4,140,175.29 


16,524,989.24 


1S64. 


30,329,149.53 
8,592,098.98 
2,290,009.14 
2,837,719.82 
193,600.48 
5,894,945.14 


1S65. 


18,731,422.45 
11,401,373.10 
3,734,928.00 
4,940,S70.90 
520,362.70 
11,162,392.14 


36,222,716.67     73,318,450.37 


etc. 


Special  taxes  (licenses)  on  all  occupa- 

pations 

Income  (persons  and  corporations)      .    . 

Legacies 

Successions 

Articles  on  Schedule  A,  pianos,  billiard 
tables,  carriages,  plate,  etc.    .    .     . 
Miscellaneous  collections,  — 

Slaughtered  animals,  special  Income 
Tax  (1864),  bank  circulation,  etc.     . 


1,661,273.51        3,426,446.32 


64,003.87 

4,799,195.73 

2,741,858.25 

56,592.61 


365,630.93 


719,218.57 


141, 231. 5S 

5,205,508.94 

20,294,731.74 

311,101.02 


696,878.43 


709,550.73 


TOTAL 41,003,192.93    117,145,748  52 


9,853,377.12 

4,062,243.54 

9,800,914.25 

32,050,017.44 

500,751..% 

39,951.32 

780,266.53 
30,220,207.40  ! 


211,129,529.17 


APPENDIX    V. 


291 


Revenue  by  Fiscal  Years,  from  September  1,  1862. 


FISCAL  YEARS 

ENDED  JUNE 

SO. 

1866. 

1867. 

1868. 

1869. 

1870. 

1871. 

$ 

$ 

$ 

$ 

• 

$ 

33,268,171.82 

33,542,951.72 

18,655,030.90 

45,071,230.80 

55,606,094.05 

46,281,848.10 

16,531,007.83 

19,765,148.41 

18,730,095.32 

23,430,707.57 

31,350,709.88 

33,578,907.  IS 

5,220,552.72 

6,057,500.63 

5,955,868.92 

0,090,879.54 

0,319,120.90 

7,389,501.82 

3,463,988.05 

2,040,562.46 

1,866,745.55 

2,190,054.17 

3,020,083.01 

3,644,241.53 

1,142,853.20 

1,459,170.80 

1,256,881.59 

877,088.79 

827,904.72 

030,980.35 

15,044,373.18 

16,094,718.00 

14,852,252.02 

16,420,710.01 

10,544,043.00 

15,342,739.40 

127,230,608.66 

91,531,331.31 

61,649,902.50 

3,345,302.95 

3,017,027.70 

11,262,420.82 

7,444,719.00 

6,280,009.34 

0,300,998.82 

0,894,799.99 

2,800,503.44 

4,002,282.91 

3,999,360.31 

4,595,909.04 

8,200,839.03 

8,837,394.97 

3,049,642.08 

14,144,418.05 

13,627,903.25 

11,889,549.09 

9,940,917.02 

11,020,787.78 

5,002,452.85 

72,982,159.03 

60,014,429.34 

41,455,598.36 

34,791,855.84 

37,775,873.63 

19,162,650.75 

924,823.97 

1,128,744.96 

1,518,387.64 

1,244,837.01 

1,072,582.93 

1,430,087.34 

246,154.88 

636,570.19 

1,305,023.00 

1,189,756.22 

1,419,242.57 

1,074,979.79 

1,693,122.73 

2,116,074.37 

1,134,339.98 

893,653.46 

907,442.09 

376,800.45 

3,750,037.32 

354,089.90 

34,310.37 

29,453.00 

22,756.00 

8,205.00 

310,906,984.17 

265,920,474.65 

191,180,564.28 

160,039,344.29 

185,235,867.97 

144,011,176.24 

292 


APPENDIX    VI. 


Receipts  from  Several  Sources 


SPIRITS, 

Including 
Special 
License 

Fees  and 

Other 
Charges. 

Tobacco  in- 
all  Forms, 
Including 
Special 
License 
Charges. 

Fermented 
Liquors, 

Including 
Special 
License 
Charges. 

adhesive 
Stamps. 

Banks 
Manu-          and 
factures    Bankers 
and          (Not  Na- 
Products.    tional). 
(1) 

9 

i 

§ 

$ 

$ 

$ 

1870 

55,606,094 

31,350,708 

6,319,127 

16,544,043 

3,017,028 

3,020,084 

1871 

4G,281,848 

33,578,907 

7,389,502 

15,342,739 

3,631,516 

3,644,242 

1872 

49,475,516 

33,736,171 

8,258,498 

16,177.321 

4,616,145 

4,628,229 

1873 

52,099,371 

34,386,303 

9,324,938 

7,702,377 

1,267,470 

3,771,031 

1874 

49,444,089 

33,242,876 

9,304,6S0 

6,136,845 

764,880 

3,387,161 

1875 

52,081,991 

37,303,402 

9,144,004 

6,557.230 

1,080,111 

4,097,248 

1876 

56,426,365 

39,795,340 

9,571,281 

6,518,488 

509,631 

4,006,698 

1877 

57,469,429 

41,106,547 

9,480,7S9 

6,450,429 

238,261 

3,829,729 

1878 

50,420,815 

40,091,755 

9,937,052 

6,380,405 

429,659 

3,492,032 

1879 

52,570,285 

40,135,003 

10,729,320 

6,706,384 

299,094 

3,198,884 

1880 

61,185,509 

38,870,140 

12,829,803 

7,668,394 

228,028 

3,350,9S5 

1881 

67,153,975 

42,854,991 

13,700,241 

7,375,256 

3,762,208 

1882 

69,873,408 

47,391,989 

16,153,920 

7,569,109 

5,253,458 

1883 

74,368,775 

42,104,250 

16,900,616 

7,053,053 

3,748,995 

1884 

76,905,385 

26,062,400' 

•  18,084,954 

442 

1885 

67,511,209 

26,407,088 

18,230,782 

25,000 

1886 

69,092,266 

27,907,363 

19.076,731 

1887 

63,829,322 

30,108,067 

21,922,187 

4,288 

1888 

69,306,166 

30,662,432 

23,324,218 

4,203 

1889 

74,312,206 

31,866,860 

23,723,835 

6,214 

1890 

81,687,375 

33,958,991 

26,008,535 

70 

1891 

83,335,964 

32,796,271 

28,565,130 

1892     91,303,984 

31.000,493 

30,037,453 

1893     94,720,261 

31,889,712 

32,548,983 

1894     85,259,252 

28,617,899 

31,414,788 

226 

1895  ,    79,862,627 

29,704.908 

31,640,618 

1     •     •     • 

(\)  The  collections  from  National  Banks  have  never  been  returned  to 
the  Commissioner  of  Internal  Revenue,  and  are  not  included  above. 
(2)  Collections  from  this  source  after  1873  are  from  penalties. 


APPENDIX   VI. 


293 


of  Revenue  from  1870  to  1895. 


Collec- 

Oleomar- 
garine. 

Ol'IUM. 

tions 
not  Previ- 
ously Enu- 
merated 

AND 

Penalties. 

(2) 

Total 
Collections 

FEOM 

Internal 
Sources. 

Total 
Collections 

FEOM 

Customs. 

Net 
Ordinary 
Receipts 

FEOM   ALL 

Sources. 
(3) 

$ 

s 

•S 

9 

$ 

9 

69,378,784 

185,235,863 

194,53S,374 

395,959,834 

34,142,422 

144,011,176 

206,270,408 

374,431,105 

14,879,067 

131,770,947 

216,370,287 

364,694,230 

5,523,965 

114,075,456 

188,089,523 

322,177,074 

364,216 

102,644,747 

163,103,834 

299,941,091 

281,107 

110,545,154 

157,167,722 

284,020,771 

409,284 

117,237,087 

148,071,985 

290,066,585 

419,999 

118,995,184 

130,956,493 

281,000,642 

346,008 

111,097,725 

130,170,680 

257,446,776 

279,498 

113,918,467  ' 

137,250,048 

272,322,137 

611,783 

123,981 ,916 

186,522,065 

333,526,501 

383,241 

135,229,912 

198,159,676 

360,782,293 

281.3S9 

146,523,274 

220,410,730 

403,525,250 

377,656 

144,553,345 

214,706,479 

398,287,582 

536,859 

121,590,040 

195,067,490 

348,519,870 

247,042 

112,421,121 

181,471,939 

323,690,706 

226,510 

116,902,869 

192,905,023 

336,439,727 

723,048 

249,488 

118,837,301 

217,286,893 

371,403,278 

864,140 

165,316 

124,326,475 

219,091,174 

379,266,075 

894,248 

91,070 

130,894,434 

223,832,742 

387,050,059 

786,292 

153,434 

142,594,697 

229,668,585 

403,080,983 

1,007,924 

260,127 

146,035,416 

219,522,205 

392,612,447 

1,266,326 

700 

242,589 

153,857,544 

177,452,964 

354,937,784 

1,670,644 

125 

175,266 

161,004,990 

203,355,017 

385,819,629 

1,723,480 

410 

152,619 

147,168,450 

131,818,531 

372,802,498 

1,409,211 

551,583 

143,246,078 

152,158,617 

390,373,203 

(3)  Net  ordinary  receipts  includes  all  of  above  collections  as  well  as  Pub- 
lic Land  Sales,  Miscellaneous  Sources,  and  Dividends. 


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